Representations and Warranties
Contractual statements of fact in a purchase agreement that allocate risk between buyer and seller.
Representations and warranties (reps and warranties, or R&W) are factual statements made by one party to another in a transaction agreement—typically a purchase and sale agreement—as of specified dates. They allocate information risk between parties: by making a representation, the representing party accepts responsibility if the statement proves false.
In M&A agreements, sellers make extensive reps and warranties covering: organization and corporate authority, financial statement accuracy, no material adverse change, completeness of disclosed contracts, intellectual property ownership and non-infringement, employment matters and benefits, tax compliance, environmental liabilities, regulatory compliance, litigation disclosures, and absence of undisclosed liabilities.
If a representation proves false after closing, the breaching party typically owes indemnification for losses resulting from the breach, subject to negotiated caps (often 10–20% of purchase price), deductibles/baskets (minimum claim thresholds), and time limitations (survival periods, typically 18–36 months post-closing).
Representations and Warranties Insurance (RWI) has transformed the M&A market by allowing buyers to purchase insurance that covers losses from seller rep and warranty breaches directly from insurers rather than pursuing sellers. RWI eliminates the need for seller escrow holdbacks in many transactions, enabling cleaner deal structures and reducing post-closing disputes. Premium is typically 2–4% of coverage amount.
Disclosure schedules accompany reps and warranties—specific exceptions and qualifications to representations that 'schedule out' known issues and prevent them from constituting breaches.
FAQs
What is a survival period for representations and warranties?
The survival period is the contractual deadline after closing during which a party can bring a claim for breach of a representation or warranty. Once the survival period expires, claims for that representation are time-barred even if the breach is later discovered. Fundamental representations (corporate authorization, capitalization, title to assets, authority to sell) typically survive for the statute of limitations period or indefinitely. General business reps typically survive 18–24 months. Tax representations often survive until the applicable tax statute of limitations plus some cushion. IP and environmental representations may have longer survival periods reflecting their elevated risk.
What is the difference between a representation and a warranty?
Historically, representations and warranties were distinct legal concepts: representations are factual statements about present or past circumstances that induce a party to enter the contract, while warranties are promises about future states. In modern U.S. M&A practice, the distinction has largely collapsed—they are treated together as factual statements whose breach triggers indemnification obligations. In English law, the distinction matters more: warranties survive closing as contractual promises while misrepresented facts can rescind the agreement. Most U.S. deal lawyers use the terms interchangeably, but legal counsel in cross-border transactions should clarify which jurisdiction's rules apply.
How does Representations and Warranties Insurance (RWI) work?
RWI is a policy purchased by the buyer (in a buy-side policy, most common) that covers financial losses arising from breaches of seller's representations and warranties in the purchase agreement. If a covered representation proves false post-closing, the buyer submits a claim to the insurer rather than suing the seller directly. This eliminates much post-closing litigation between parties. The seller can receive deal proceeds clean without extended escrow holdbacks. Underwriting involves insurer review of due diligence work product and representation schedules. Coverage limits typically equal 10–20% of enterprise value; retention (deductible) is typically 0.5–1% of enterprise value.
Related Terms
Indemnification
Contractual obligation by one party to compensate another for losses arising from specified events or breaches.
Due Diligence
Systematic investigation of a business or investment to verify facts and identify material risks before closing.
Term Sheet
Non-binding document outlining the key terms of a proposed investment or acquisition deal.
Earnout
Contingent payment mechanism tying part of the acquisition price to the target's future financial performance.
