Representations and Warranties
A representation is an assertion as to a fact, true on the date the representation is made, that is given to induce another party to enter into a contract or take some other action. A warranty is a promise of indemnity ( www.practicallaw.com/2-382-3536) if the assertion is false. The terms "representation" and "warranty" are often used together in practice. If a representation is not true it is "inaccurate." If a warranty is not true it is "breached."
In financing documents (such as loan agreements) representations and warranties are given by the borrower to induce the lenders to make loans. Once the loans are made, if a representation is no longer true, the lenders have the right to enforce their remedies against the borrower. While representations and warranties have different meanings and different remedies under law, in the context of a loan agreement, the differences are irrelevant because the consequences of an inaccurate representation or breach of warranty are provided for contractually in the loan agreement.
In M&A transactions, representations and warranties are given by both parties to disclose material information. The seller's representations and warranties tend to be more extensive because they include information about the target company or business and the stock or assets and liabilities being transferred. The representations and warranties allocate risk between the parties and serve as the foundation for an indemnification claim in case of a breach or inaccuracy. A breach or inaccuracy of a representation or warranty can also provide the other party with a right to terminate or refuse to close the transaction. For some examples of representations and warranties in M&A transactions, see Standard Documents, Stock Purchase Agreement (Pro-Buyer Long Form): Articles III and IV ( www.practicallaw.com/4-382-9882) , Asset Purchase Agreement (Pro-Buyer Long Form): Articles IV and V ( www.practicallaw.com/6-384-1736) and Stock Purchase Agreement (Auction Form): Articles III and IV ( www.practicallaw.com/3-502-5305) .