Transaction Academy · Module 11

Representations & Warranties.

Representations and warranties are among the most important provisions in any acquisition agreement. Learn how they allocate truth-telling risk between buyers and sellers.

Overview

Representations and warranties are among the most important provisions in any acquisition agreement. They are the statements of fact each party makes about itself, the business, and the transaction. These provisions allocate risk by allowing the parties to rely on the accuracy of the information provided before closing.

For buyers, representations and warranties provide assurance that the business has been accurately described. For sellers, they define the scope of the promises being made and establish the framework for post-closing liability.

Nearly every business acquisition—whether structured as an asset purchase, stock purchase, membership interest purchase, or merger—includes representations and warranties.

This module explains their purpose, the types of representations commonly included, and why they are heavily negotiated.

Lesson 1

What Are Representations & Warranties?

A representation is a statement of existing or past fact.

A warranty is a contractual promise regarding the truth of that statement.

Although the terms are often used together, purchase agreements typically refer to them collectively as Representations and Warranties.

These provisions serve several important purposes:

Provide information about the business.
Allocate risk between the parties.
Support due diligence.
Establish the basis for post-closing claims if certain statements prove inaccurate.

Because buyers rely on these statements when deciding whether to complete the acquisition, their accuracy is critical.

Lesson 2

Seller Representations

Most representations in an acquisition agreement are made by the seller.

Common seller representations address:

Organization and Good Standing — The business has been properly formed, is validly existing, and has authority to conduct its operations.
Authority — The seller has the legal authority to enter into the transaction and perform its obligations.
Ownership — The seller owns the assets or equity interests being sold and has the right to transfer them.
Financial Statements — Financial statements have been prepared in accordance with the agreed standard and fairly present the financial condition of the business.
Material Contracts — The seller has disclosed significant contracts affecting the business, and those agreements are generally in force.
Litigation — The seller discloses pending or threatened litigation, claims, or governmental proceedings involving the business.
Compliance with Laws — The business has complied with applicable laws and regulations, subject to disclosed exceptions.
Taxes — Required tax returns have been filed, and applicable taxes have been paid or appropriately addressed.
Intellectual Property — The business owns or has the right to use its intellectual property.
Employees — The seller discloses material employment matters, benefit plans, restrictive covenant agreements, and labor issues.

Lesson 3

Buyer Representations

Although less extensive, buyers also make representations.

Common buyer representations include:

Authority to enter the transaction.
Valid organization and good standing.
Required approvals have been obtained.
Ability to perform closing obligations.
Availability of funds (when applicable).

These representations provide the seller with confidence that the buyer is capable of completing the transaction.

Lesson 4

Materiality Qualifiers

Not every issue affecting a business is significant enough to justify a legal claim.

For this reason, many representations include materiality qualifiers.

Examples include:

No material litigation.
No material breach of contracts.
No material adverse effect.

Materiality qualifiers help distinguish significant issues from routine business matters.

The definition of "material" is often negotiated because it can affect the parties' rights after closing.

Lesson 5

Knowledge Qualifiers

Some representations are limited by the seller's knowledge.

For example:

"To Seller's Knowledge, there is no pending litigation."

Knowledge qualifiers recognize that a seller may not be aware of every circumstance affecting the business.

The purchase agreement often defines:

Whose knowledge is relevant.
Whether knowledge includes constructive knowledge or only actual knowledge.
Whether reasonable inquiry is required.

These provisions can significantly affect post-closing liability.

Lesson 6

Disclosure Schedules

Representations and warranties are commonly supplemented by Disclosure Schedules.

Disclosure Schedules identify exceptions to the seller's representations.

Examples include:

Existing lawsuits.
Significant customer contracts.
Intellectual property registrations.
Environmental matters.
Employment agreements.
Government investigations.
Outstanding loans.
Regulatory issues.

Rather than changing the representation itself, the schedules disclose information that qualifies or limits the representation.

Comprehensive Disclosure Schedules are an important part of risk allocation in most transactions.

Lesson 7

Why Buyers Care

Representations and warranties reduce uncertainty.

They allow buyers to:

Confirm important facts.
Verify due diligence findings.
Allocate risk.
Negotiate indemnification protections.
Identify issues requiring further investigation.

If a representation proves inaccurate, the buyer may have contractual remedies depending upon the terms of the agreement.

Lesson 8

Why Sellers Care

Representations also protect sellers by defining exactly what they are—and are not—promising.

Well-drafted representations help sellers:

Clarify the scope of their obligations.
Limit post-closing exposure.
Disclose known issues.
Reduce misunderstandings.
Allocate risk fairly.

Negotiating appropriate qualifications and Disclosure Schedules is often as important as negotiating the representations themselves.

Lesson 9

Relationship to Due Diligence

Representations and warranties work together with due diligence.

Due diligence allows the buyer to investigate the business.

Representations allocate legal responsibility for the information provided.

Together, they help create a more informed and balanced transaction.

Lesson 10

Relationship to Indemnification

Representations and warranties do not operate in isolation.

If a representation is inaccurate, the purchase agreement's indemnification provisions typically determine:

Whether a claim may be brought.
How long the representation survives after closing.
Monetary limitations.
Claim procedures.
Available remedies.

For this reason, representations and warranties are closely connected to the indemnification provisions discussed in the next module.

Key Takeaways

What to remember from this module.

Representations and warranties are statements of fact made by the parties regarding the business and the transaction.
Seller representations typically address ownership, financial statements, contracts, taxes, litigation, intellectual property, employment matters, and compliance.
Buyers also make representations regarding their authority and ability to complete the transaction.
Materiality qualifiers, knowledge qualifiers, and Disclosure Schedules help allocate risk and define the scope of the parties' obligations.
Representations and warranties provide the foundation for many post-closing indemnification claims.

What's Next

Module 12 — Indemnification

Learn how buyers and sellers allocate post-closing risk through indemnification provisions, including survival periods, baskets, caps, exclusive remedies, and the procedures for asserting and resolving indemnification claims.

Start Module 12

Educational Disclaimer

The information contained in this module is provided solely for educational and informational purposes. It is intended to provide a general overview of representations and warranties in mergers and acquisitions and does not constitute legal, tax, accounting, investment, or financial advice. Reading this material or using the Transaction Academy does not create an attorney-client relationship with GV LAW PLLC. Every transaction is unique, and buyers and sellers should consult qualified professional advisors regarding their specific circumstances.