Which M&A Representations Do I Really Need?
M&A lawyers often get stuck negotiating pages and pages of representations and warranties in purchase agreements on behalf of their buyer clients. So let’s say I am stranded on a desert island negotiating with “Wilson,” the volleyball, for the purchase of a coconut water business. Wilson will only give me five representations in our purchase agreement. Which representations should I ask for?
- Title – It is essential that Wilson represent to me that he has good title to the assets of the coconut water business. If we’re negotiating a share purchase, I will need to know that Wilson’s company has good title to its assets and that Wilson has good title to the shares that I am buying. Without a representation about title, I could be paying Wilson for something he doesn’t own - and we all know he can be one tricky little volleyball.
- Issued and outstanding share capital – This is also a key representation in any share purchase transaction. I need to be comfortable that I am acquiring all of the outstanding shares of Wilson’s company and that there will be no other securities that could be issued after I acquire his shares. If I don’t have representations about the share capital of Wilson’s company, I could end up with some unwanted minority shareholders and have no recourse to Wilson. On the other hand, maybe those guys will know how to build a raft…
- Accuracy of financial statements – The historical financial performance of the coconut water business was a key factor in how I arrived at the purchase price that I am willing to pay to Wilson. I need to be assured that the financial statements on which I relied are true and correct so that I can have confidence in my valuation and financial modeling work. In addition, the balance sheet provides me with some comfort on the nature of the assets and liabilities of the coconut water business. And there’s quite a bit of information in the notes to the audited financial statements that Wilson will effectively be confirming for me in this representation. I would also sneak in a representation that there haven’t been any material changes to the coconut water business since the date of the most recently audited financial statements. Wilson probably won’t notice.
- Material Contracts – I need comfort on the nature of the risks and rewards associated with the material contracts of the coconut water business. Representations relating to material contracts can assist in protecting me from some pretty nasty surprises after closing. For example, I can get some comfort on whether the business has been carried on in compliance with these contracts, whether any third party consents are required to complete our transaction and whether there will be any restrictions on me carrying on the business after closing.
- Compliance with laws – A simple representation that Wilson is conducting the coconut water business in accordance with applicable law will go a long way here. Compliance with law representations are usually repeated in many contexts in a typical purchase agreement – securities, employment, occupational health and safety, privacy, intellectual property, real estate, environmental, tax, etc. I think this one representation will really give me a lot of bang for my buck.
See you at the closing dinner on the beach, Wilson. We’re serving seafood by the campfire.
Purchase Agreement representations & warranties