Mergers and acquisitions (M&A) are complex transactions that involve a mix of financial, legal, and strategic considerations. When parties negotiate an M&A agreement, whether in the form of an Asset Purchase Agreement (APA), or Stock Purchase Agreement (SPA or Equity Purchase Agreement), one of the most important—and often heavily negotiated—topics addresses representations and warranties (“reps and warranties”). Although buyers and sellers will approach reps and warranties differently, reps and warranties serve to, among other things, allocate risk, protect each party from hidden liabilities, and serve as the foundation for post‑closing remedies.
This article explains what reps and warranties are, why they matter, what “fundamental reps” are, and provides examples of a few of the most common reps and warranties found in typical M&A deals.
In an M&A deal, simply put, "representations" are factual statements made by one party to another (generally about the state of the business or assets being bought and sold, and the legal status and ability of each party to enter into, and fulfill their obligations with respect to, the transaction), and "warranties" are contractual promises that those statements are true and will remain true through closing. In other words (i) representations generally address what is true as of a certain date (e.g., “The Company’s financial statements are accurate and prepared in accordance with GAAP”), and if a representation turns out to be false, it can support a claim for misrepresentation or fraud; while (ii) warranties function as assurances that if a statement is false, the breaching party must compensate or indemnify the other. Although both parties (i.e. the buyer and the seller) will often make reps and warranties to each other, the seller generally makes more. Together, these provisions help ensure that buyers receive the business they believe they are buying—without undisclosed risks, inflated valuations, or hidden liabilities. Sellers, in turn, rely on their own set of representations and warranties from the buyer, such as that the buyer has the funds and authority to close the transaction.
Reps and warranties serve several essential purposes in an M&A transaction:
- Risk Allocation: Every M&A deal involves uncertainty. Buyers typically lack complete information, even after due diligence. Reps and warranties allocate the risk of that informational gap between the parties. If a seller represents that the company has no pending litigation, and a lawsuit later surfaces that predates closing, the buyer can seek indemnification because the representation was false.
- Information Disclosure and Due Diligence: The process of negotiating reps and warranties forces both sides to engage deeply in disclosure. Sellers must review and often disclose exceptions to the representations in a disclosure schedule, while buyers can use those disclosures to refine their valuation and closing conditions. This process makes due diligence more transparent and prevents surprises after the deal closes.
- Basis for Post‑Closing Remedies: Reps and warranties underpin the legal remedies available after closing. A breach allows the injured party to make a claim for damages or indemnification, often subject to limitations such as survival periods, baskets, and caps. Without clearly defined reps and warranties, it would be far harder to allocate responsibility for future disputes.
- Negotiation and Pricing Tool: The scope and depth of reps and warranties can affect the purchase price. A buyer that must accept limited reps and warranties might seek a lower price to offset the higher risk. Conversely, a seller confident in its disclosures may be able to offer robust warranties to justify a higher valuation.
Not all representations are created equal. Some are so central to a deal that both parties agree they deserve special treatment—these are often known as “fundamental representations” or "fundamental reps."
Fundamental reps cover the most basic aspects of a company’s legal existence and ability to complete the transaction. Because a breach of a fundamental rep can undermine the entire deal, these reps usually:
- Survive longer than other reps (often indefinitely or for several years).
- Are generally not subject to baskets or caps, or are subject to higher limits—meaning the buyer can often recover up to the full purchase price for breaches.
- May be backed by escrow or holdback funds, helping ensure funds are available if claims arise.
A few standard fundamental representations include:
- Organization and Good Standing – Representing that a company is duly organized, validly existing, and in good standing under applicable law.
- Capitalization – Representing that a seller owns all of the company’s equity interests, and the capitalization table is accurate.
- Authority and Enforceability – Representing that a party has the legal power and authority to enter into the agreement, and the agreement is binding.
- Title to Shares or Assets – Representing that a seller owns and can transfer the shares or assets being sold, free and clear of liens.
- No Brokers – Representing that no broker or finder is entitled to a fee unless specifically disclosed.
- Tax Matters (sometimes included) – Representing that all required taxes have been paid, and returns filed accurately.
Beyond the fundamental reps, M&A agreements contain abroad range of business‑specific and deal-specific representations and warranties. These target particular risk areas that could affect the company’s value or operations. Although many reps and warranties are generally included in all M&A transactions, certain reps and warranties may be specific to certain types of transaction. Additionally, the specificity of individual reps and warranties may turn on the nature of a deal, the size of the transaction, and other deal-specific factors. Accordingly, reps and warranties should always be carefully drafted and reviewed to help ensure they are correctly tailored to each transaction.
That being said, some common reps and warranties found in many M&A deals include:
- Financial Statements and Undisclosed Liabilities - Generally given by the seller to represent that financial statements have been prepared in accordance with GAAP and fairly present the company’s financial condition. The seller also generally represents that there are no undisclosed liabilities outside the ordinary course of business.
- Compliance with Laws and Permits - Representing that a party or business is in compliance with all applicable laws, and it possesses all necessary permits and licenses to operate its business.
- Material Contracts - Generally given by a seller to represent that all contracts that are material to the business—such as major customer agreements, supplier contracts, or leases—are valid, enforceable, and not in default (as such contracts may also be individually listed out in an exhibit or schedule to accompany such representation).
- Intellectual Property - Representing that the company owns or has valid rights to use all necessary intellectual property, and that there are no known infringements or disputes.
- Employees and Benefit Plans - Representing that a selling company has complied with labor, employment, and benefits laws, and that all benefit plans have been disclosed, properly administered, and adequately funded.
- Litigation - Representing that there is no pending or threatened litigation, arbitration, or governmental investigation against a party other than as disclosed.
- Taxes - Representing that all tax returns have been properly filed and all taxes paid and there are no outstanding audits or reassessments.
- Environmental Matters - Representing that a company is in compliance with environmental laws and has no environmental liabilities or contamination at its sites.
- Real and Personal Property- Representing that a company has good title to its owned properties and valid leases for leased assets.
Representations and warranties may feel like dense legal boilerplate, but they are anything but. They define what each party is promising about a transaction, how truth is verified, and how risk is shared if something turns out to be wrong. Given this, as mentioned above, representations and warranties are often one of, if not the most, negotiated parts of a merger or acquisition transaction. Generally, buyers will seek broad reps and warranties to uncover hidden risks and mitigate exposure, while sellers will aim to narrow them to limit future liability. Reps and warranties negotiations also often revolve around seemingly minor details, such as use of “materiality” qualifiers, “knowledge” qualifiers, and survival periods, however, these details can have significant implications that many parties may not realize on their own. Accordingly, consulting with an experienced M&A attorney is essential when navigating an M&A transaction, whether on the buy-side or sell-side.
