Business agreements can be incredibly complex, regardless of the kind of transaction. One of the most important elements in any business contract is the section on “representations and warranties.” This critical component is one of the most common causes of action in lawsuits brought by one party to a business agreement against another. Representations are statements of fact. Warranties are promises that representations are true and usually establish remedies in the event of a breach.
Misrepresentation, if proven, can terminate a contract in its entirety. Warranty breaches usually only allow for damages to put claimants into the positions they would have been in if the warranties had been true. Because of the high risk and legal exposure involved, it’s recommended that you seek the services of an experienced business attorney to help you draft or amend agreements to represent your interests and limit your liabilities.
Excerpt From an Acquisition Contract
For reference, here is an abridged sample portion of a representations and warranties section for a company in the process of being acquired:
1. Organization: The Company is a validly existing, duly organized corporation in good standing in the State of ________, has the power to conduct its business in the current manner, and is qualified to conduct business in all jurisdictions in which the location and character of assets owned by it, or in which the nature of its business transactions requires qualification, or in which failure to so qualify would have an adverse material impact on it. To the Company’s knowledge, no penalty or proceeding is pending or threatened in which it is alleged that the nature of the Company’s business necessitates qualification in any additional jurisdiction.
2. Authority: The Company has full authority, power, and rights to enter into this Agreement and into each document, agreement, and instrument to be executed and delivered by the Company pursuant to this Agreement and to carry out all transactions contemplated hereby and thereby. No consent or waiver of any person is required in connection with the delivery, execution, and performance by the Company of this Agreement, and each document, agreement, and instrument to be executed and delivered by the Company pursuant to this Agreement.
3. Capitalization: The Company’s authorized capital stock solely consists of ________ shares of common stock, of which ________ shares are issued and outstanding, and ________ authorized shares of preferred stock, of which ________ shares are issued and outstanding. All the Company’s shares are owned of record and beneficially by the shareholders in the amounts set forth in the [attached schedule]. No outstanding dividends exist, current or accumulated, due or payable on any of the Company’s capital stock. Any stock to be issued to the Acquirer is, and when delivered pursuant to this Agreement will be, (i) duly authorized, validly issued, and outstanding; (ii) non-assessable, fully paid and free of preemptive rights; and (iii) free and clear of any and all restrictions, pledges, charges, claims, liens, encumbrances, security interests, or other interests of third parties of any nature whatsoever. As of the date hereof, there exist no outstanding warrants, options, rights, agreements, or commitments of any kind for the issuance or sale of, or outstanding securities convertible into, any additional shares of any class of the Company’s capital stock, and there exist no voting agreements, voting trusts, proxies, or other instruments, agreements, or undertakings with respect to the voting of any Company stock to which the Company or any of its shareholders is a party.
4. Financial Statements: The Company’s financial statements present fairly the Company’s financial condition on the dates upon said statements and the results of its operations for the periods thereby covered and will be prepared in accordance with generally accepted accounting principles and practices consistently applied and consistent with the Company’s accounting books and records.
Enlist a Pro
As you can see, the representations and warranties section is quite involved and precise. A complete section could easily be 10 times longer. It’s no exaggeration to say that the assistance of a good business attorney is essential.
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