Representations and warranties
M&A / Merger ModelStatements of fact about the business given by the seller, which give the buyer a claim if they turn out to be untrue.
Also written: reps and warranties, warranty schedule
Warranties cover what the buyer cannot verify: that the accounts give a true and fair view, that there is no undisclosed litigation, that the company owns its assets, that the material contracts are in force. They are the contractual counterpart to diligence, and they are what makes it possible to buy a business you have only been able to inspect through a data room.
English practice draws a distinction that American drafting collapses. A warranty is a contractual promise, and breach gives damages designed to put the buyer where it would have been had the statement been true, which on a share purchase generally means the difference between the value of the shares as warranted and their actual value. A representation is a pre contractual statement, and a false one can support a misrepresentation claim, where damages put the buyer where it would have been had the statement never been made and where rescission may be available. That is why an English law agreement often says the seller warrants, and expressly excludes claims in misrepresentation.
Two mechanisms then cut the protection down. Disclosure qualifies the warranties, so anything fairly disclosed in the disclosure letter and the data room behind it cannot be claimed on, which is why a seller discloses generously and a buyer prices what it has been shown. Limitations do the rest: a de minimis, an aggregate threshold, a cap expressed as a proportion of the price, and survival periods that are shorter for commercial warranties than for tax and title.
An indemnity is a different instrument for a different job. A warranty covers the unknown and the buyer has to prove its loss. An indemnity covers one identified risk and pays across when that risk crystallises, which is why a quantifiable diligence finding becomes an indemnity or a price reduction rather than being left to the warranties.
Worked example
A buyer discovers in diligence that the target has an aggressive transfer pricing position. It appears in the data room, so it is disclosed, and the warranty on tax will not catch it.
The buyer therefore takes a specific tax indemnity on that position instead, and separately relies on the tax warranties for anything it has not been shown.
The general lesson is that finding a problem does not make it a warranty claim. Finding it usually removes it from the warranties altogether.