Formal declarations by the seller in a purchase agreement regarding the state of the company, the breach of which entitles the buyer to claim indemnification.
Due diligence can be thorough, but it is never perfect. There are always risks that go undetected, contingencies that have not yet materialised, and information the seller knew that the buyer did not. Representations and warranties (reps & warranties) are the contractual mechanism that protects the buyer against those residual risks — and the section of the SPA where the most intense negotiation battles are fought.
Representations and warranties are formal statements that the seller makes in the sale and purchase agreement (SPA) about the condition of the company at the time of closing. They are factual assertions that the seller certifies as true and complete, and whose falsity or breach entitles the buyer to claim indemnification.
In Anglo-Saxon legal tradition, the two concepts have distinct meanings:
In practice, the two are typically grouped together and function as a unified system of buyer protection.
A typical catalogue in a mid-market transaction includes declarations on:
The company. The entity is validly incorporated, has the capacity to operate, its corporate books are current, and there are no undisclosed shareholder agreements.
The shares. The seller is the legitimate owner, the shares are free from encumbrances, there are no undisclosed pre-emption rights, and there are no options or commitments to issue new shares.
Financial statements. The annual accounts for the last three years present a true and fair view. There are no unrecorded liabilities. The EBITDA disclosed during negotiations corresponds to reality.
Tax matters. The company has met all tax obligations. There are no open audits or undisclosed tax contingencies. Transfer prices with related parties are set at arm’s length.
Employment matters. Employment contracts are in order. There are no pending or potential labour claims. Social security obligations have been met. There are no undisclosed pension plans or employee commitments.
Material contracts. Key agreements (major customers, suppliers, leases, licences) are in force with no breaches or threatened terminations. No change-of-control clauses are triggered by the transaction.
Intellectual property. The company owns all the trademarks, patents, domain names, and software it uses. There are no infringements of third-party rights.
Regulatory compliance. The company complies with all applicable regulations (environmental, data protection, anti-money laundering, sector-specific). It holds all licences and permits needed to operate.
Litigation. There are no pending or threatened judicial, arbitral, or administrative proceedings other than those disclosed.
Representations and warranties do not operate in isolation. They are accompanied by mechanisms that make them effective:
Indemnification. If a representation proves false or incomplete, the seller must indemnify the buyer for the loss suffered. Indemnification may be on a euro-for-euro basis or subject to agreed limits.
Disclosure letter. The seller may qualify specific representations by disclosing facts that contradict them. For example: “I declare there are no pending labour disputes, except for proceedings before Labour Court No. 3 (case 123/2024).” What is disclosed is excluded from indemnification coverage.
Quantitative limits. Standard provisions include:
Survival period. General representations typically survive 18 to 24 months from closing. Tax representations extend to the statute of limitations (four years in many jurisdictions). Fundamental representations may survive indefinitely.
Escrow. A portion of the price (typically 10-15%) is retained in an escrow account during the warranty period, ensuring the seller has funds available to cover potential claims.
Blue Mountain closes the acquisition of an environmental services company. The SPA includes a seller representation: “The company has complied with all applicable environmental obligations and there are no unrecorded environmental liabilities.”
Eight months after closing, a regulatory inspection discovers that the company discharged waste without authorisation in 2023 and imposes a fine of 180,000 euros plus an obligation to remediate contaminated land (estimated cost: 320,000 euros).
Blue Mountain claims indemnification from the seller under the environmental representation. The total claim (500,000 euros) exceeds both the de minimis and basket thresholds and falls within the cap. The seller indemnifies the buyer from the funds held in escrow.
Without the environmental representation and warranty, Blue Mountain would have absorbed the 500,000 euros as an acquisition cost. With it, the risk reverts to the seller — who knew (or should have known) about the situation.
Technically yes, but it would be extremely imprudent. Even with exhaustive due diligence, undetected risks always remain. Dispensing with reps & warranties means accepting that any hidden problem will be borne by the buyer with no recourse. This might only be justified in transactions where the price discount amply compensates for the risk assumed (such as certain going-concern purchases in insolvency).
It is an insurance policy that covers losses arising from breaches of representations and warranties. The buyer takes out the policy and, in the event of a claim, collects from the insurer rather than claiming against the seller. The premium is typically 1-2% of the coverage limit. It is particularly useful when the seller does not want post-closing exposure or when the buyer doubts the seller’s future solvency.
A great deal. They are typically the most time-consuming part of the SPA negotiation. The seller wants to minimise exposure (low cap, broad disclosure letter, short survival periods). The buyer wants to maximise protection (high cap, narrow disclosure letter, long survival periods). The equilibrium depends on each party’s negotiating power and the level of competition among buyers.
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