In an era of increasing consolidation in the mortgage banking industry, mergers and acquisitions are occurring with more frequency. Regardless of deal structure, the basic transaction documents typically contain representations and warranties of the buyer and the seller to one another, which set forth the basic assurances of a party that certain facts are true and may be relied upon when entering into the transaction.

Should a representation or warranty be found not be true at a later time, the party that relied upon the misrepresentation may seek remedies that are available under the agreement. These remedies may include the right to terminate the agreement if the event is discovered prior to closing, or indemnification claims for misrepresentations discovered after closing.

Representations and warranties disclose material facts about the assets or stock that are being purchased and the liabilities that are being acquired or assumed. Representations and warranties are often qualified in whole or in part by materiality, material adverse effect, and actual or imputed knowledge standards. Representations and warranties also may be limited to a certain set of information provided to a party, for example, to the documents provided in a data room, or to the documents set forth on the disclosure schedules to the transaction agreement.

While both the buyer and seller will make representations and warranties, the seller’s representations will be more extensive and normally will cover the entire business being sold. Some sellers are successful in selling their assets “as is,” in which case the representations and warranties will be more limited. Seller representations and warranties will usually address the following substantive areas:

  • Due organization of the seller and its legal authority to consummate the transaction
  • Compliance with laws and permits
  • Good and marketable title to the seller’s assets, free and clear of liens
  • Any required third-party consents to consummate the transaction
  • The physical condition of the fixed assets and the overall adequacy of the assets to run the business
  • The liabilities of the seller
  • Accounts receiv1able, inventory, and other current assets
  • The accuracy of the seller’s financial statements and its financial condition
  • Tax, intellectual property, environmental, ERISA, and employment matters
  • Litigation matters
  • Material contracts
  • Real property matters
  • Broker’s fees

Common buyer representations and warranties cover the following areas:

  • Due organization of the buyer and its legal authority to consummate the transaction
  • Any required third-party consents to consummate the transaction
  • The adequacy of the buyer’s funds to complete the transaction
  • Broker’s fees

Many transactions do not close simultaneously with the execution of the transaction agreement. In cases where there is a delayed closing, the transaction agreement will typically require the buyer and the seller to “bring down” their respective  representations and warranties to the time of closing. This assures the parties that there have not been any changes in the representations and warranties during the period between entering the agreement and the closing.

It is critical that the parties carefully review and understand the representations and warranties before signing a transaction agreement. Counsel for sellers should assist the sellers in reviewing and drafting representations and warranties to ensure they accurately reflect the facts and reduce the risk of a breach. Counsel for buyers should assist the buyers in drafting remedies that provide the buyers with the greatest protection in the event of a breach of a representation or warranty.