Mergers and Acquisitions For Dummies (78 page)

Signed counterparts to various agreements, including the escrow agreement, noncompetition and non-solicitation agreements, employment agreements, confidentiality agreements, leases, and any other agreement between Buyer and Seller

Review the representations and warranties

The purchase agreement spends an inordinate amount of space dealing with the issue of representations and warranties, or reps and warranties for short.
Reps and warranties
are basically promises and fall into three camps: promises the Seller makes, promises the Buyer makes, and promises both sides make. These guarantees tend to be pretty similarly worded from deal to deal; in fact, many lawyers simply use the language from an earlier agreement they worked on!

In most deals, the reps and warranties are far more onerous for the Seller than for the Buyer. Seller, prepare thyself for a slew of schedules and tables and a huge amount of work!

You can provide representations and warranties on the past (in other words, on known events). Don't provide reps and warranties on the future (unknown events). For example, a Seller can provide a representation that the books are accurate but shouldn't offer a representation that her largest customer will still be the largest customer in one year.

Seller's reps and warranties

The Seller typically provides the Buyer with a bevy of representations and warranties to proclaim that everything that she says (or represents) about the company in the purchase agreement is true to the best of her knowledge.

The gist of all these promises is that Seller has run the company in the
normal course
of business (that is, a clothing distributor suddenly hasn't entered the music business), that she has the right to sell the business, that the company hasn't experienced any adverse material changes since the LOI was signed, and that she's being completely truthful — Buyer won't discover any unpleasant surprises after the deal closes.

Representations and warranties, although full of legalese, should be taken very seriously. These representations will come back and haunt Seller if she lied or misrepresented any of them. In that case, Buyer has recourse to be reimbursed from the money in escrow and possibly through a lawsuit against Seller.

In an actual purchase agreement, each bullet consists of a lengthy paragraph chock-full of legalese. In brief, these promises can include

Seller is the owner of the shares or assets and that those shares or assets are free from liens.

Seller has the authority to legally sell those shares or assets.

The sale of the assets or stock doesn't violate or conflict with any laws, rules, or regulations of any governmental authority.

The company is a corporation duly organized, validly existing, and in good standing.

The company has full corporate power, legal right, and corporate authority to execute and deliver this agreement.

Change of control will not trigger some sort of material change, such as an agreement with a major customer that allows the customer to cancel an important contract.

Seller represents the
capitalization
of the company — that is, how many shares are authorized, issued, and outstanding and any other specific details about that stock. Details on the capitalization may be included on a schedule.

No options, warrants, or other agreements pertaining to a claim of the company's ownership are outstanding.