In the world of mergers and acquisitions, the asset purchase agreement (“APA”) is a cornerstone document, and seller representations and warranties are among its most scrutinized provisions. Understanding the purpose, scope, and strategic implications of these clauses is essential.
What Are Representations and Warranties For?
At their core, seller representations and warranties are about building trust in a transaction where the buyer starts at a disadvantage. Unlike the seller, who has intimate knowledge of the business, its operations, and its risks, the buyer is stepping into unfamiliar territory. Coupled with due diligence, reps and warranties help provide the buyer with a better picture of the business.
They serve two essential functions:
- Disclosure Mechanism: Reps require the seller to affirm key facts about the business, such as its assets, contracts, compliance, and more. This gives the buyer a clearer picture of what they’re buying and helps fill in the gaps that diligence may miss.
- Risk Allocation Tool: If any of those affirmations turn out to be false or incomplete, the buyer may have a right to seek remedies, typically through indemnification. This shifts certain risks back to the seller and protects the buyer from hidden surprises.
For sellers, reps and warranties are a chance to demonstrate transparency and credibility. A well-prepared seller, backed by thorough disclosure schedules and carefully negotiated language, signals to the buyer: “You can trust what you’re getting.”
Some Common Representations and Warranties
Though the wording can differ, most APAs contain a core set of seller reps and warranties, sometimes dozens in total. These can include:
- Organization and Authority: The seller is duly organized and has the authority to enter into the agreement.
- Title to Assets: The seller owns the assets being sold, free and clear of liens (except as disclosed).
- Compliance with Laws: The business has operated in compliance with applicable laws and regulations.
- Contracts: Material contracts are valid and enforceable, and there are no undisclosed breaches.
- Taxes: All taxes related to the assets have been properly paid or accrued.
- Litigation: There are no pending or threatened lawsuits that could affect the assets.
Representations That Deserve Extra Attention
Some reps and warranties carry more risk and complexity—and deserve heightened scrutiny:
· Material Contracts: These are critical agreements that support the company’s operations and strategic relationships. The following representations may be included:
o All material contracts have been properly disclosed
o There are no existing defaults or breaches under any such agreements
o Contracts are assignable without the need for third-party consent, or required consents have been obtained
· Customer and Supplier Relationships: These representations are intended to evaluate potential risks to business continuity:
o No major customer or supplier has expressed an intention to terminate or materially modify existing terms
o There are no ongoing disputes or material performance issues with key accounts
· Intellectual Property: If IP is a core asset of the business, it’s essential to confirm ownership and freedom from infringement risks. Key areas to review include:
o Use of open-source software and compliance with applicable licenses
o Proper IP assignment agreements from contractors
o Validity and scope of third-party licenses
· Environmental Matters: Environmental liabilities can pose significant risks, even in non-industrial transactions. These reps may include:
o Compliance with environmental laws
o No hazardous substances on the property
o Proper permits and disclosures
Final Thoughts
For sellers, representations and warranties aren’t just legal formalities – they’re a window into how buyers assess risk and value. Every rep is a statement about a business’s past and present, and each one can carry post-closing consequences. That’s why it’s critical to approach them strategically, not just compliantly.
To learn more about Washington’s Seller Representations and Warranties in Asset Purchase Agreements, please contact Beresford Booth at info@beresfordlaw.com or by phone at (425) 776-4100.