Representations and warranties are covered by warranty clauses (herein referred to collectively as “statements”), as well as indemnification for breach of warranties (a warranty is broken if any statement is false or inaccurate) in a Share Purchase Agreement. A representation or warranty should be referred to as a statement in Indian law, however, representations and warranties are commonly used in common law-governed legal systems.
Purpose, Categories, and Timing of Representations and Warranties
In the seller’s statements, the objective is to present information about the target company and its constituent parts at a particular time. They fall into two categories in this regard: (i) fundamental or core statements (such as those pertaining to share ownership or whether there are encumbrances on shares and legal capacity), and (ii) business, operational or non-core statements (such as information regarding material contracts, employees, taxes or accounting).
In addition, the seller’s statements outline the (potential) guarantor of its obligations as far as relevant. As a result, the buyer is reasonably seeking to get an accurate picture of the target company in terms of its legal position (i.e., claims, encumbrances), finances, assets (i.e., intellectual property, real estate, etc.), business operations, employment, group structure, etc.
Preventive and remedial purposes are the core purposes of this “screening” method described above.
In order to prevent this from happening, the seller should analyze the assets and financial position of its company in detail and inform the buyer accordingly. As a result, it facilitates risk management on the seller’s part and promotes diligent fact-finding. Thus, the buyer is able to decide whether to accept the risk without reservations, demand an adjustment, or even withdraw from the deal based on an informed decision.
Remediation involves compensating the buyer if the statement in question is inaccurate, incomplete, or misleading, depending on the manner in which it is worded in the relevant sale document.
There is a big difference in the content of statements in a given transaction based on a seller’s business activity. For instance, a pharmaceutical company may make statements that are different from that of a telecommunications company. An exemplary and non-exhaustive list of statements could include:
- It is important to verify that the shares were validly issued, that they comprise the entire share capital, that the seller owns the shares legally and beneficially, that the seller has the right to transfer the shares, that there are no encumbrances on the shares;
- The seller’s obligations and powers;
- The company’s constitution, structure, and general organization;
- Compliance with legal requirements, including regulatory approvals;
- The company’s potential material transactions since the date of the accounts;
- Accounts and financial information of the company, including their completeness, consistency, and compliance with applicable laws and standards;
- Contractual obligations of the company, such as major supply agreements;
- Property owned by the company or occupied by it;
- A list of the company’s employees, including their salaries and headcount;
- It includes establishing pension schemes, paying contributions on time, reporting complaints, mediations, and claims (if any);
- Premiums paid for insurance policies taken out by the company;
- Compliance with data protection legislation and non-infringement of intellectual property and IT rights by the company;
- If there have been any liquidations or bankruptcies, or if there have not;
Depending on the buyer’s expectations, the seller might elaborate on each point with varying degrees of detail. This can be accomplished by splitting the statement into “core” and “operational” statements.
In accordance with applicable market practice, most statements are provided upon the signing of the agreement and are repeated at closing by means of a bring-down clause (if a time lapse exists between signing and closing). Exceptions to this rule are statements in respect of accounts, which are issued as of the “accounts date” (defined in the sale document).