Meaning
Contractual statements of fact made by the seller about the state of the target company during a corporate sale form the foundation of buyer protection. These acquisition reps cover areas such as capitalization, litigation history, intellectual property ownership, and financial health. The obligations under these statements expire after a negotiated survival period.
Factual Warranty
Verification of corporate history requires formal guarantees that all operating records are accurate and complete. Sellers must disclose every known liability and pending dispute when making acquisition reps. This disclosure prevents future claims of misrepresentation.
Liability Exposure
The financial risk associated with inaccurate disclosures remains with the sellers for a defined period after the transaction closes, usually ranging from twelve to twenty-four months. Indemnification clauses in the merger agreement specify how much of the purchase price is held in escrow to cover breaches of acquisition reps. A claim of breach requires clear evidence of pre-existing falsity and measurable harm.
This mechanism ensures that the risk of hidden liabilities does not shift to the buyer immediately upon execution.
Documentary Proof
Written disclosures and schedule attachments serve to limit the scope of these representations. Reviewing the disclosure schedules allows the seller to carve out exceptions to the acquisition reps. The resulting schedules protect the founders from claims based on known historical issues.
