M&A Glossary
Representations and warranties: what the seller is liable for
Representations and warranties are the catalogue of statements the seller makes about the state of the company, recorded in the share purchase agreement. If they turn out to be untrue, the buyer has a claim. This is the longest and most heavily negotiated part of the agreement, because it is where responsibility for the company’s past is allocated.
What they cover
The scope is broad and usually covers title to the shares, the accuracy of financial statements, the completeness and validity of customer and supplier contracts, tax and social security settlements, employment matters, intellectual property, regulatory compliance, the absence of undisclosed disputes and the condition of assets. Manufacturing businesses add environmental matters, services businesses add data protection.
Disclosure, the mechanism that matters most
The seller is not liable for what has been disclosed. A disclosure letter is attached to the agreement, listing every departure from the warranties given: a pending dispute, an unsigned contract, an arrear, an audit. Anything disclosed ceases to be a basis for a claim.
This is the practical reason why hiding problems from a buyer is the worst available strategy. A disclosed problem reduces the price by a calculable amount. A hidden problem, once discovered, triggers liability and undermines the credibility of every other warranty.
Limits of liability
De minimis
- minimum size of a single claim
- cuts out trivia
Basket
- aggregate before a claim can be brought
- often 1 per cent of price
Cap
- maximum liability
- often 10-30 per cent of price
- higher for title to shares
Time limits
- 12-24 months for general warranties
- longer for tax
- unlimited for title
These claims are typically secured by an escrow, deferred payment or warranty and indemnity insurance, which shifts the risk to an insurer and lets the seller leave with the full amount.
Frequently asked
Questions about representations and warranties.
How long am I liable after selling the company?
It is a matter of contract. The standard is one to two years for general warranties, longer for tax, usually until the limitation period expires, and unlimited for title to the shares.
How do I limit my liability?
By disclosing everything that departs from the warranties, by negotiating thresholds and the cap, and by insurance. The order matters: disclosure is the cheapest and most effective.
What is W&I insurance?
Warranty and indemnity insurance, a policy covering claims under the warranties. It is bought most often where the seller is a fund that wants to distribute proceeds immediately, but it is increasingly used in private sales too.
See also
- M&A glossary - 72 terms used in transactions
- How we run a company sale
- How we work and how we charge