A purchase and sale agreement, often called a PSA, is a legally binding contract that outlines the terms and conditions of a transaction between a buyer and a seller. Within this agreement, one critical component that can significantly impact the deal's outcome is the section on representations and warranties. In this blog, we'll explore the importance of representations and warranties in a purchase and sale agreement and discuss key considerations from a legal perspective when drafting these clauses.
Understanding Representations and Warranties
Before delving into the intricacies of drafting representations and warranties, it's essential to grasp what these terms mean in a purchase and sale agreement.
- Representations: Representations are statements made by either the buyer or the seller regarding specific facts or circumstances related to the transaction. These statements are intended to inform the other party of the current state and condition of the subject matter being sold. Representations can cover various aspects, such as the financial condition of the business, the accuracy of financial statements, ownership of assets, and compliance with laws and regulations.
- Warranties: Warranties, on the other hand, are similar to representations but carry a more substantial legal implication. When a party provides a warranty, they guarantee the statement's accuracy and truthfulness. If a warranty is later found to be false or breached, the party providing it may be legally liable for damages.
Key Considerations for Drafting Representations and Warranties
Now, let's dive into the key considerations when drafting representations and warranties in a purchase and sale agreement from a legal standpoint:
- Specificity and Accuracy: One of the primary responsibilities when drafting these clauses is ensuring that the statements made are accurate and specific. Vague or ambiguous language can lead to disputes down the road. Both parties must carefully review and validate the accuracy of the representations and warranties before finalizing the agreement.
- Materiality: Clearly define what matters are considered material and subject to disclosure. Materiality thresholds help distinguish between minor issues and significant concerns that could impact the deal's outcome. Material misrepresentations or breaches are often grounds for termination or compensation.
- Survival Period: Specify when representations and warranties remain valid. Typically, these clauses survive the transaction's closing for a certain period, allowing the buyer to bring claims for breaches discovered after the deal is finalized. Ensure that the survival period aligns with applicable statutes of limitations.
- Indemnification: Outline the indemnification provisions that govern the consequences of a breach of representations and warranties. Define how disputes will be resolved, whether through negotiation, mediation, or arbitration. Additionally, establish the indemnification cap, which limits the maximum liability of the breaching party.
- Disclosure Schedules: Include disclosure schedules that accompany the representations and warranties. These schedules allow the seller to list exceptions and qualifications to their statements, reducing the risk of future disputes. The buyer should thoroughly review and approve these schedules.
- Third-Party Consents: Address any representations and warranties that require third-party consents or approvals. Ensure that the necessary permissions have been obtained or that the agreement includes mechanisms to secure them before closing.
- Knowledge Qualifiers: Consider whether the seller's knowledge should qualify representations and warranties. By including such qualifiers, the seller is only held responsible for what they knew or should have known when making the statements, reducing the risk of liability for unknown issues.
Strike a Balance
The primary factor behind over 90% of failed business sales is the lack of experience. When drafting representations and warranties, it's essential to balance providing the necessary information for a transparent transaction and protecting your interests. By partnering with Catalyst Legal experts who are well-versed in purchase and sale agreements, you can confidently navigate this process, knowing that your legal interests are safeguarded throughout the transaction.