In a purchase agreement, a representation is an assertion of fact made by one party to another as an inducement to enter into a contract. A warranty is a promise of indemnity if a representation is false. Representations and warranties (R&Ws) are often made together in the purchase agreement and may be subject to negotiation.
Depending on the nature of the transaction, a purchase agreement may contain numerous R&Ws. Here are five of the most common examples:
1. Organization and Qualification
This representation is made if the party making the R&W is an entity and not an individual. Each party represents that it is duly organized or incorporated and in good standing under the laws of its jurisdiction. In an asset purchase agreement, the seller may also represent that it is qualified to do business in all states where the to-be-sold assets are located.
2. Authority
Each party represents that it has the requisite authority to enter into the transaction. This is especially important for entities, as it confirms that all necessary corporate formalities have been followed prior to closing.
3. No Conflicts
Each party represents that the transaction will not violate, breach, or constitute a default under any agreement to which it is a party. This typically includes both internal governance documents and third-party contracts. The parties also generally represent that the transaction does not conflict with any applicable law or government order.
4. Title to Assets
The seller represents that it has good title to the purchased assets or, in the case of a stock or membership interest sale, to the assets owned by the company being sold. Often, the assets are listed on a disclosure schedule attached to the purchase agreement. In a stock purchase, the purchase agreement may instead reference an ancillary document, such as a financial statement.
5. Sufficiency of Funds
The buyer represents that it has sufficient funds to pay the cash portion of the purchase price, if applicable.
This can get complicated
These are only a few examples of the representations and warranties commonly found in purchase agreements. In an initial draft of a purchase agreement, the drafting party may include many more R&Ws for its counterparty than absolutely necessary. False representations breach the purchase agreement, and the related provisions can be complex and nuanced. Therefore, it’s essential to engage legal counsel early in the process to help narrow or limit, where appropriate, your R&Ws in the purchase agreement. Doing so helps ensure you fully understand what you are asserting as fact in the purchase agreement and limits your potential legal exposure.
This is part one of a three-part series introducing some key concepts in purchase transactions. This content is general information and should not be construed as legal advice.
More about Andrew Vining: Andrew is a Corporate Services Partner with Practus, LLP. Andrew advises businesses at every stage of the corporate lifecycle, from formation and capital raising to mergers and acquisitions, to day-to-day operations. He also represents clients in general litigation and real estate transactions.
