The Middle Ground

A GUIDE TO DEAL TERMS IN PLAIN ENGLISH


+ Introduction

+ Purchase and Sale

+ Closing

+ Representations & Warranties - Seller

+ Representations & Warranties - Buyer

+ Covenants

+ Conditions to Closing

+ Indemnification

+ Termination

+ Miscellaneous

Organization of Buyer


Classification: Situation-Specific
Section: Representations and Warranties of Buyer
Negotiation Time: Minimal
Transaction Costs: Insignificant
Major Impact: Risk Management


What is This? The Representations and Warranties of Buyer portion of the Agreement is used to save the Seller time and money. Rather than require the Seller to go through third parties to find certain information, the Buyer provides the information and must reimburse the Seller for any Losses it suffers if the information is false or misleading. Here, the Buyer provides information regarding its current legal status.

The Middle Ground: The Buyer represents that its entity was legally organized and is in good standing under the laws of its state of organization.

Purpose: As a practical matter, the main concern of most sellers involved in a transaction is whether they will receive their payment in accordance with the terms of the Agreement. Whether the Buyer’s company was correctly organized and maintains good standing is only of consequence to the Seller if the deal is structured as a merger or a stock for stock acquisition, or if the Seller plans on continuing to work for the Business after the transaction. If the Buyer is setting up a new entity as an “investment vehicle” to complete the transaction or is paying the entire Purchase Price in cash at Closing, the most pragmatic of sellers will not give a second thought to whether the Buyer’s company was created properly. However, if the Seller’s payment depends in part on the success of the Buyer’s business, the Seller will want to ensure that the entity validly exists and is not in jeopardy of losing its “good standing” status.

Buyer Preference: None, this is a standard representation.

Seller Preference: None, this is a standard representation.

Differences in a Stock Sale Transaction Structure: The content of the representation will not change based on the transaction structure, but its importance will vary based on the payment structure of the transaction.


DISCUSSION

We want The Middle Ground to be an ongoing dialogue for and resource to the lower middle market M&A community. The outline above is generally applicable, but there is always specific case law and nuance around certain industries that can be useful in helping buyers and sellers come together. If you are a lawyer or deal professional, we encourage you to add your perspective below.