Classification: Moderately Material
Section: Representations and Warranties of Seller
Negotiation Time: Minimal to Moderate
Transaction Costs: Insignificant
Major Impact: Risk Management
What is This? The Representations and Warranties of Seller portion of the Agreement is used to save the Buyer time and money. Rather than require the Buyer to go through third parties to find certain information, the Seller provides the information and must reimburse the Buyer for any Losses it suffers if the information is false or misleading. Here, the Seller affirms that the information it has provided throughout the Transaction Documents is accurate and complete.
The Middle Ground: Here, the Seller represents that nothing in the Agreement, the Disclosure Schedules, or any other Transaction Documents misstate or omit a material fact that would make any statements made in those documents misleading.
Purpose: This representation is included to ensure that the disclosures and representations made by the Seller are not misleading, even if they are technically accurate. Thus, this section is yet another risk management tool being used by the Buyer to avoid bearing the brunt of any unwelcome surprises that arise after the purchase.
Buyer Preference: In addition to this representation, the Buyer may seek an additional representation from the Seller stating that, to the Seller’s knowledge, no undisclosed event or circumstance exists which could reasonably be expected to have a Material Adverse Effect on the Business.
Seller Preference: The Seller will want to exclude this representation in its entirety on the basis that the other representations included in the Agreement adequately address the Buyer’s transaction risk. If successful, the Seller may also want to include a provision stating that it makes no representations or warranties other than those in the Agreement. An alternative option for the Seller is to have the Buyer represent that it conducted its own independent investigation of the Business and that it is relying solely on that investigation and the express representations and warranties of the Buyer in agreeing to the transaction. Both of those additional clauses are aimed at precluding the Buyer from being able to assert non-contract claims based on the Seller representations and warranties (such as a tortious fraud claim), thereby limiting the Seller’s risk.
Differences in a Stock Sale Transaction Structure: This representation tracks the language in Rule 10b-5 of the Exchange Act, and since that rule is applicable in a stock sale the Buyer does not have as strong a need to include the representation in the actual Agreement. However, the Buyer may still try to include it since the substantive and procedural requirements for succeeding on a 10b-5 claim are more onerous than what is required to receive indemnification.
We want The Middle Ground to be an ongoing dialogue for and resource to the lower middle market M&A community. The outline above is generally applicable, but there is always specific case law and nuance around certain industries that can be useful in helping buyers and sellers come together. If you are a lawyer or deal professional, we encourage you to add your perspective below.