When a business sells substantially all of its assets, the Asset Purchase Agreement will contain a section containing representations (“rep” for short) and warranties. These are generally styled as statements of fact concerning various important aspects of the assets and the transaction. Generally, the seller provides the majority of reps and warranties (although the buyer will often “sign off” on a few).
The reps and warranties are intended to be relied upon by the party “receiving” the reps and warranties. Indeed, the Asset Purchase Agreement will specifically state that the reps and warranties are being relied upon. For example, something like the following statement will be included: “Seller warrants and represents to Buyer the following, intending to induce Buyer’s reliance and understanding that the Buyer will rely thereon: …”
Reps and warranties offer a level of confidence because, if the reps and warranties turn out to be false, then there are legal remedies. These legal remedies include bringing suit for fraud, which might involve nullifying the entire transaction and putting the parties back in their “original positions.” The legal remedies also include filing claims for breach of warranty. The reps and warranties are also often relied upon by others, including those entities or third parties that are financing the purchase, providing insurance coverage, or engaged in other services related to the transaction.
Reps and warranties also assist in the due diligence process leading up to the consummation of the transaction. Many reps and warranties are common and expected. As one example, most Asset Purchase Agreements will contain some rep/warranty about litigation or administrative actions. The representation might be phrased as follows:
“There is no suit or action, legal, administrative, arbitration or other proceeding or governmental investigation affecting the Assets pending, or threatened against Seller that materially or adversely affects the Assets.”
If the Seller refuses to agree to this representation, that is a “red flag” that suggests a lot of due diligence is needed to determine if there are pending lawsuits or other proceedings. The Seller may also want to modify the representation by adding the phrase “to the best knowledge and belief of Seller.” That is less concerning but still suggests that more due diligence is needed on this potential issue.
There are a number of commonly included reps and warranties in Asset Purchase Agreements. These might even be called “boilerplate.” These include reps and warranties about:
- Corporate authority
- Ownership of the assets and good title
- Assets being free from liens and encumbrances
- Non-infringement — if the assets involve intellectual property
- Quality and quantity of assets
- No material change in assets from the signing of the Asset Purchase Agreement to closing
- Brokers and fees
- Insurance — coverage, past and current claims related to the assets
- Compliance with laws
- Payment of taxes
- Litigation and other similar proceedings with respect to the assets
Contact the Business Attorneys at Revision Legal For more information, contact the experienced Business Lawyers at Revision Legal. You can contact us through the form on this page or call (855) 473-8474.
