In a merger or acquisition, the buyer company typically wants the target company to agree to detailed representations and warranties on issues such as authority, capitalization, intellectual property, tax, financial statements, compliance with law, employment, ERISA, and material contracts. (In fact, the target’s representations and warranties usually comprise the bulk of the acquisition agreement.)
Representations and warranties serve three key purposes:
- Information. They allow the buyer company to learn as much as possible about the target company before signing the acquisition agreement.
- Protection. They allow the buyer company to cancel or renegotiate terms of the transaction between signing and closing if information is discovered that belies the representations and warranties.
- Support. They provide the framework for the target company’s indemnification obligations to the buyer company after the closing.
Note: When negotiating the merger or acquisition transaction agreement, typically the buyer company wants representations and warranties “narrowly drawn” – that is, limited to just a few specific issues. Conversely, the target company wants them to be “broad and flat” – that is, general language that’s designed to cover as many potential issues as possible.