San Diego Mergers and Acquisitions: Some Common Representations and Warranties

When a San Diego business contemplates a merger with or acquisition of another business, the purchase agreement tends to be long as there are many things to cover. One of the many long sections in a standard purchase or sale agreement is the section on representations and warranties. A “representation” is a legal word meaning “statement of truth,” and a “warranty” indicates that the statement can be relied upon and that, if the statement is false, a lawsuit can be filed seeking damages for the falsity of the statement. If your business is contemplating a merger or acquisition, you should retain a San Diego corporate attorney will a lot of experience in mergers and acquisitions. Among the advice and counsel that can be provided concerns the representations and is a list of typical examples:

  • Legal status — this representation/warranty states that the target company is duly formed and is in good standing; this is particularly important in California since a corporation that has not paid its corporate taxes will not be in good standing
  • Authorization — this representation is about the board of directors and shareholders authorizing the purchase or sale; obviously, this is necessary or the deal cannot proceed
  • No conflicts — this representation/warranty seeks a statement that the merger or acquisition will not conflict with any other contractual obligation of the target company; if there is a contractual conflict, the conflict must be resolved before closing; sometimes, a commercial lease is an example where there is a conflict that must be resolved; generally, if there are subsidiaries or affiliates involved, “no conflict” representations/warranties are needed for them too
  • Fees/commissions — here, the buyer wants to avoid litigation with some business broker that is undisclosed; all commissions must be paid at the closing
  • Litigation — generally, the buyer wants to know that the target company is not burdened with a lot of litigation; litigation is expensive and any adverse judgments can easily destroy the value of a business merger or acquisition deal
  • Threatened litigation — threatened litigation is just a risky as pending litigation
  • Environmental Matters — if land is being purchased as part of the merger or acquisition, environmental contamination issues can also destroy the value of the deal for the buyer
  • Taxes — similarly, actual or threatened unpaid tax liabilities can destroy the value of the deal; in addition, the buyer usually must state that tax returns and financial statements are true and accurate
  • Capitalization — generally, these representations confirm the structure of ownership such as the classes of stock
  • Employee matters — labor-related issues can also destroy the value of an purchase or sale; as such, many representations are needed about employee contracts, severance packages, employee behavior that might result in litigation/adverse judgments or government action and more
  • Material contracts — here the buyer wants a list of all the important contracts that have been signed by the target company; these need to be reviewed
  • Properties and other assets (including IP) — any merger or acquisition will have a list of the properties and assets that are being transferred along with a representation that the target company has complete, undisputed and legal title to those assets; litigation over “who is the owner” can destroy the value of the deal
  • Accounts receivable and other financial information — the buyer wants to know that the financial information provided by the target is accurate
  • Financing and other borrowing/credit – same as above; buyer wants to know that all the information about current debt, financing, and credit of the target company is accurate
  • Key suppliers or customers — where the supply chain or a key set of customers is important, representations/warranties are needed to assure the buyer that the suppliers/customers have not indicated that they will take their business elsewhere
  • No additional representations — this representation/warranty is a protection for the target company; the buyer is relying on representations/warranties and the target wants to avoid any dispute over a statement made somewhere/someplace other than the purchase agreement
  • And more

As can be seen, there is a high level of complexity in just the representation/warranty section of an merger and acquisition purchase agreement. Merger and acquisition deals require experienced legal counsel to ensure all your bases are covered.

Contact San Diego Corporate Law Today

For more information, contact attorney Michael Leonard, Esq., of San Diego Corporate Law. Mr. Leonard can be reached at (858) 483-9200 or via email. Mr. Leonard can assist with the formation of your business entity, mergers and acquisitions, contract drafting and review including commercial leases, and establishment and licensing of trademarks, copyrights, and trade secrets. Like us on Facebook.

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