Representations and Warranties
Representations and warranties are the seller's statements of fact about the business in the sale agreement — the accounts are true, the licences valid, there is no litigation, the contracts are as listed — on which the buyer relies and for which it can claim if they prove false. They are the buyer's protection against what diligence did not find; the disclosure letter is where the seller says what it knows to be untrue.
- Also known as
- Reps and warranties, R&W, Warranties, Seller warranties
- Used at
- every share and asset purchase agreement; given at signing and usually repeated at completion
- Binding
- yes — a breach gives the buyer a claim for damages (a warranty) or, for a representation in US practice, sometimes rescission; the agreement caps, floors and time-limits the claims
- Typical limits
- a cap of 10–30% of the price for business warranties (100% for title and capacity), a de minimis per claim and a basket before any claim is paid, and a claims period of 18–24 months (longer for tax)
- Typical protection for the buyer
- an escrow or retention of 5–15% of the price, or warranty and indemnity insurance in place of it
- Parties
- the seller who gives them, the buyer who relies on them, and increasingly an insurer who underwrites them
How representations and warranties work in practice
The buyer's lawyers draft a schedule of forty to a hundred statements the seller is asked to make: about the company's constitution, its accounts, its assets, its contracts, its employees, its compliance, its tax, its litigation. For a fintech there is a regulatory schedule — the licence is valid, the firm is in compliance, there is no open supervisory action, the safeguarding accounts reconcile, the AML programme meets the rules. The seller cannot give all of them as absolute statements, so it qualifies them: by its knowledge, by materiality, and by disclosure — the disclosure letter lists everything the seller knows that would make a warranty untrue, and a disclosed matter cannot be claimed for.
The warranties do two things. Before signing they force disclosure: a seller asked to warrant that there is no litigation will disclose the litigation. After completion they allocate risk: if something undisclosed turns out to be wrong and it costs the buyer money, the buyer claims under the warranty, subject to the caps. The negotiation is over those limits — the cap, the de minimis, the basket, the period — and over what backs the claim: a seller who has distributed the proceeds may not be able to pay, so the buyer asks for an escrow, or the parties buy insurance and the seller's exposure drops to nil.
Indemnities are the sharper cousin: a pound-for-pound promise to pay for a specific known risk, outside the warranty limits — the tax enquiry that is already open, the regulatory remediation already ordered.
Example
A buyer pays €30m for an e-money institution. The warranties are capped at 20% (€6m), with a €25,000 de minimis, a €300,000 basket and an 18-month claims period; €3m sits in escrow for 18 months. The disclosure letter discloses a regulator's information request about transaction monitoring. Fourteen months after completion the regulator fines the company €900,000 for monitoring failures over the two years before the sale; the buyer claims. The seller argues the request was disclosed; the buyer argues the disclosure did not reveal that the failures existed, only that questions were being asked. The escrow pays €700,000 in settlement. Had the buyer taken a specific indemnity for the monitoring matter — as its lawyers advised when they read the disclosure — it would have recovered the whole €900,000 outside the caps.
Common mistakes
- Warranties given without a disclosure exercise, so the seller warrants things it knows are untrue. - A disclosure letter that discloses a document rather than a fact, and a buyer that accepts it. - Caps and periods negotiated as a package without asking which warranties actually matter — for a fintech, the regulatory ones. - A known risk covered by a warranty rather than an indemnity, so the claim is fought on materiality and disclosure. - No escrow, no insurance and a seller who is three individuals with the proceeds already spent.