• Representations and warranties are assertions or assurances given by the parties to the agreement. While most purchase agreements contain representations and warranties from seller and buyer, the seller representations and warranties typically are the most extensive and more important.
    • The seller representations and warranties are assurances by the seller about the company and, in the case of a stock or membership interest sale, the seller’s equity interest in the company. The primary goal of seller representations and warranties is to transfer risk from the buyer to the seller. This happens because the buyer has indemnity protection against the seller’s breach of representations and warranties, and thus the representations and warranties and the indemnity provision dictate how much risk a seller has in a deal.
    • In addition to providing assurance about the condition of the company, seller representations and warranties assist the buyer to focus its due diligence on key issues. For example, if the seller representations and warrants that the company has only 5 customer contracts, the buyer knows it has only 5 customer contracts to review.
    • Seller representations and warranties are not required by law but are in nearly every purchase agreement. I have had deals in which the seller representations and warranties fill less than a page and other deals in which the seller representations and warranties have filled 30 pages.

 

More Blog Posts