Reps and Warranties
Representations and Warranties or Reps and Warranties is a term that constitute the underlying facts of the contract and it describes the assertions that a buyer and/or seller makes in a purchase and sale agreement.
Every contract has some sort of representations and warranties (reps and warranties) that constitute the underlying facts of the contract. Typically when a contract has both the terms, reps, and warranties, they tend to blend everything from the past, and present as well as of the future along with the terms of that contract.
Although every contract may be different, the language used in them is pretty similar. Both buyer and seller rely on each other for providing all the supporting documents and necessary information for closing the transaction.
Reps and Warranties: Description
The representations of a seller will relate to all the information that a buyer will be relying on for valuing a company. Hence, the seller is not only limited to say that all the related information are true, but have to showcase sufficient information for supporting the statement with the help of valuable documents such as copies of major contracts, consumer/supplier listings, financial statements, equipment listings, etc. Such information can act as a reference after post transaction for ensuring that the purchase truly exists.
The representation of a buyer will relate to that type of consideration taken for completing the transaction. When a buyer’s stock will take part in a transaction, the buyer must ensure that it represents the stock legally. Additionally, a shareholder agreement has to be provided by the buyer to the seller for reviewing those stocks to find out if they are free from hindrance.
In general, a warranty may take place between a present and a future scenario. The product you are buying will be free from defects, with the warranty to fix defects during a specific time in the near future by the Company. Some products are made available to the consumers as a lifetime warranty. That means every time that particular product malfunctions, the company will get that fixed for you. A warranty obligates a seller to adhere to the terms of that contract.
There are two types of warranties, expressed or implied. Expressed warranties are written within the contract and buyers must insist upon them. Whereas, the implied warranties will fall under the Uniform Commercial Code, which will make sure that there will be fitted for some particular purpose. An expressed contract holds better in law rather than implied warranties.
For reducing the risk of a financial loss incurred from either of the two parties for not representing anything significant, the agreement must contain the indemnification clause. This will protect the other party for misrepresentation, or omitted representation that might lead towards a financial loss post-transaction. Hence, it is extremely important that both the buyer and seller provide sufficient information in their representation and warranties for avoiding legal disputes which might be costly, in an attempt to impose indemnification clauses.
Reps and warranties example – representations and warranties clause example
Representations and Warranties. The representations and warranties of the Company contained herein shall be true and correct on the date hereof and on and as of the Closing Date; and the statements of the Company and its officers made in any certificates delivered pursuant to this Agreement shall be true and correct on and as of the Closing Date.
or Reps and warranties example in stocks trading example :
Brokers and Finders. Neither Seller, on its own behalf or on behalf of Global, Holding or the Company, nor any of Seller’s, Global’s, Holding’s or the Company’s respective officers, directors or employees has employed any broker or finder for which Seller (or a Subsidiary of Seller other than the Company and its Subsidiaries) is not responsible for such broker’s or finder’s fees or incurred any Liability for any brokerage fees, commissions or finder’s fees in connection with the Transaction for which Seller (or a Subsidiary of Seller other than the Company and its Subsidiaries) is not responsible.
Ownership of Purchaser Common Stock. As of the date hereof, Seller does not Beneficially Own any shares of Purchaser Common Stock.
Reps and Warranties: Benefits
So far the buying and selling agreement goes, a seller is needed to provide sufficient detailed information for backing up all the facts and features so that they can be presented to a buyer, who has practically no experience or maybe have a little knowledge, about the nature of business. The benefits of reps and warranties for both buyers and sellers serve better, and here are some of them.
Lessening The Chances Of A Financial Loss – An indemnification clause is included in the reps and warranties that help to diminish any kind of financial losses if either of the two parties withdraws important reps that might lead to some sort of financial loss post-transaction of the agreement.
Setting Grounds That Are To Be Required For Closing The Deal – The seller will be required to disclose about the business’s position in a detailed document that will include information about the number of consumers, inventory, past revenues, current contracts, etc. and hence the reps and warranties sets a stage for closing a sale transaction.
Providing A Detailed Confession About The Seller’s Business – The seller will be having full knowledge about its business, whereas a buyer will be interested more in getting a full disclosure about the nature of business for a smooth understanding of the transaction.
Assuring Further Proceedings Of The Transaction – To get a further continuation of the deal, the seller will be provided with the reps and warranties by the buyer, which reflects their ability to get the deal closed with proofs of financing or funds.
Reps and Warranties: Challenges
It is pretty natural that both the parties involving in a business transaction want to lose, and hence it will be the mutual interest of both the parties to have a winning deal. On some rare occasions, however, the reps and warranties face some challenges. On such an issue may be the cost that relates to the survival periods.
While dealing with the negotiations, the costs of doing business vary with the survival period. Generally, a buyer might prefer a longer survival time for more inspection. Although it may not be suitable for some sellers that want to close the deal as early as possible. A poor negotiation on a survival period will result in both parties paying unnecessary expenses.
Another challenge arises when both the parties get confused with the two terms. It might be confusing when using the reps and warranties separately because of their interpretation shifts legally. A representation will be used to lure the consumer for entering the contract. But if a seller violates and breaks the contract, the buyer might terminate the contract and seek for compensation of those damages.
Whereas, only after a representation, the warranty comes within the contract. If by any chance the seller breaks the agreement, a buyer might not terminate the contract but can seek compensation for the damages.
Reps and Warranties: What Lawyers Look For
The reps and warranties will present directions to the buyers for conducting attentiveness for the transaction. The parties will be represented by the attorneys who will scrutinize the deal for ensuring that a fair deal is conducted between both the buyer and seller. Everything related to the deal will be scrutinized that might include legal information about the business, tax audit, financial statements of the business, inventory status, employee’s contribution, environmental liability, and few other things.
Conclusion:
Reps and Warranties are nothing but that a buyer and a seller give to one another through an agreement. The assurances are recorded statements that help the purchasing party to rely on those facts as authentic.
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