Representations and Warranties

Representations and warranties are statements of fact and assurances made by the parties. They are usually the longest part of the merger agreement and take the most time to negotiate, particularly those made by the target company. These are statements made by the parties which:

• • Disclose material information about the parties, particularly the target company.
  • Allocate risk between the parties.
  • Serve as the foundation for an indemnification claim in case of a breach (see Indemnification).
  • Impact a party's obligation to close the transaction or right to terminate the agreement before closing and walk away. The parties often must make representations again as a condition to closing.

Limitations of Representations and Warranties

The scope of representations and warranties can be limited in the following ways:

• • Materiality: A representation or warranty can be qualified by what is material or what might cause a material adverse effect. For example, the target company might represent and warrant that "the company is not a party to any material legal action."
  • Knowledge: A representation or warranty can be qualified by what a party knows or should know. For example, the target company might represent and warrant that "to its knowledge, there is no legal action pending against the company." The knowledge definition can be limited to the actual knowledge of certain key employees of the target company or can impose a duty of care or inquiry, such as providing that the target company "would have known after a reasonable investigation."
  • Range: A representation or warranty can be limited to certain materials. For example, the representation or warranty might be limited to the materials identified in the data room.
  • Time: A representation or warranty can be made as of a specified date or time. For example, the target company might make a representation or warranty as of the signing date or as of the fiscal year end.
  • Scheduled information: A representation or warranty can be limited by reference to the disclosure schedules For example, the buyer may represent and warrant that "there is no broker's fee payable except as set forth on Schedule...."

Questions

• Please explain what is meant by the following sentence: "Representations and warranties are statements of fact and assurances made by the parties."
  • What is meant by "a statement of fact...made by the parties"?
  • What is meant by "assurances made by the parties"?
• Please choose 2 of the "Limitations of Representations and Warranties" and explain
  • How both of them work, and
  • Why a buyer or seller may want to include or exclude such limitations from their merger agreements.