Exploring Representations and Warranties in M&A Transactions

Asset Sale v Share Sale: Buyer Beware

October 4, 2023

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November 16, 2023

Building upon our previous discussion on our M&A series regarding asset sale and share sale transactions, it is also important to delve further into the intricate web of representations and warranties in asset sale or share sale transactions.

🚀 Representations and warranties play a fundamental role in establishing trust between the parties involved. In an asset sale or share sale transaction, representations and warranties predominantly revolve around crucial elements such as company’s financial health, assets, liabilities, and other critical aspects of the company. Buyers place significant reliance on these representations and warranties given by the sellers for a multitude of key reasons as follows:

1. Risk Mitigation

Representations and warranties act as a safeguard against any undisclosed issues or hidden liabilities. They ensure that the buyer gains a comprehensive understanding of the true condition of the subject company.

2. Valuation

Representations and warranties play a pivotal role in determining the valuation of the transaction. Accurate and true representations can justify a higher purchase price, while discrepancies might lead to negotiations and adjustments in the valuation.

3. Due Diligence

Buyers typically conduct legal, financial and taxation due diligence to validate the representations and warranties provided by the sellers. The objective is to ensure that the sellers’ statements align with the actual state of affairs, reducing uncertainty.

4. Termination Rights

Breaches or untrue statements within the representations and warranties can trigger termination rights or indemnification provisions, which are essential for safeguarding a buyer’s interests and protecting against misrepresentations.

5. Post-Closing Remedies

In the event of misrepresentations or breaches, buyers can seek remedies such as indemnification, potential adjustments in the purchase price and other remedies designed to rectify discrepancies and protect the buyer’s investment.

Having said the above, it is essential for buyers to exercise due diligence and engage legal counsel to:

✅ Assess the scope and accuracy of the representations and warranties provided by the sellers.

✅ Understand the limitations and qualifications that may apply.

✅ Identify any red flags or discrepancies during the due diligence process.

✅ Negotiate for favorable terms and protections.

In conclusion, representations and warranties are crucial elements in any M&A transaction. They provide a safety net for buyers, ensuring transparency and protecting their interests. Remember, a well-informed buyer is a confident buyer.

#MergersAndAcquisitions #DueDiligence #BusinessTransaction #LegalInsights #BuyerBeware

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Exploring Representations and Warranties in M&A Transactions

Asset Sale v Share Sale: Buyer Beware

Traditional Fundraising vs Modern Fundraising