Classification: Deal Driver
Section: Representations and Warranties of Seller
Negotiation Time: Minimal
Transaction Costs: Intermediate
Major Impact: Risk Management and Transaction Completion
No Conflicts; Consents
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 provides information regarding its ability to complete the transaction without third-party interference.
The Middle Ground: The Seller represents that performance of its obligations under the Agreement does not conflict with its organizational documents or any law or Governmental Order. It also represents that no consents are required to transfer the Purchased Assets other than those listed in the Disclosure Schedules and that performance of the Agreement will not result in any Encumbrances, other than Permitted Encumbrances. Finally, it states that no consents, approvals, permits, or Governmental Orders are required from the government, and no notice or filings are required to be provided to the government, to consummate the transaction (other than those required by the Hart-Scott-Rodino Antitrust Improvements Act of 1976, known as the “HSR Act,” if the HSR Act applies to the transaction).
Purpose: These representations indicate there are no legal or governmental roadblocks to completing the deal, which, if true, makes it much more likely that the transaction will be finalized. Furthermore, the Disclosure Schedules that correspond with this section are where the Seller lists out every consent that is required to transfer the Assigned Contracts to the Buyer, and the parties work from that list to try to obtain those consents. Thus, this representation is a significant source of both comfort and information for the Buyer, and it gives the parties an idea of the legwork that will be required to complete the transaction.
Buyer Preference: The Buyer will want the representations regarding Assigned Contracts to cover all such contracts, not just Material Contracts. Furthermore, the Buyer will not want this representation to include any sort of materiality qualifiers. It will also want to know whether performing the Agreement will give any third party the right to terminate or modify existing contracts or permits and, if so, which contracts or permits could be affected.
Seller Preference: The Seller will only want to speak to (and/or disclose) conflicts and consents that have a material impact on the transaction. More specifically, the Seller does not want to be exposed to liability for making a false representation in this section unless the representation relates to its own organizational documents or has a Material Adverse Effect on the transaction or the value of the Purchased Assets. In other words, the Seller will want a basic materiality qualifier at a minimum, but ideally disclosure would only be required if the conflict or consent would have a Material Adverse Effect.
Differences in a Stock Sale Transaction Structure: None.
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.