Purchase agreement part two: who bears a broken promise?
Representations and indemnification allocate post-closing risk.
Representations and warranties are statements about the company, the sellers, and the buyer at signing or closing. They cover topics such as authority, financial statements, taxes, contracts, employees, litigation, compliance, intellectual property, and customers.
To the extent the purchase agreement provides, disclosure schedules qualify specified representations and warranties. Preparing them is not clerical work: effective disclosure may require sufficient specificity and placement in the appropriate schedule, and it may not eliminate the underlying liability. Management, counsel, and the deal team should begin the process early enough to verify the information.
The agreement also defines remedies. Review survival periods, baskets or deductibles, caps, escrows, exclusions, special indemnities, and the rules for making and defending claims. Determine whether certain representations are treated differently and whether fraud or other exceptions change negotiated limits.
representations and warranties insurance may shift some risk to an insurer, but it does not remove the need for accurate diligence or disclosure. Policies contain retentions, exclusions, coverage limits, and claim procedures. The specific policy and transaction documents must be read together.
Owners should distinguish a customary allocation of unknown risk from a request that they retain a known, quantifiable exposure. Some matters are better resolved through price, a specific escrow, a covenant, or remediation before closing.
Transaction counsel should lead this analysis; the financial adviser helps connect legal provisions to economic exposure and negotiating priorities.