This talk describes the representations and warranties clauses in a typical business purchase contract, the clauses limiting time in which such clauses may be enforceable, the dollar limits on same, and other non-contract ways to enforce your deals, such as reps and warranties insurance, fraudulent transfer litigation, arbitration, and suits against negligent deal intermediaries

1. Enforcing Your
Deal
Presenter: William A. Price, Attorney at
Law, www.growthlaw.com

2. Part I: Contract
Terms
CONTAINING
Reps and
Warranties

3. Contract Representations and
Warranties I: Essentials
• Duly organized entity in good standing
• Authority in signer and company to do deal
• Capital structure permits deal: clause also
defines whose votes needed: complete
corporate book attached, with permissions
• No third party rights or liens that could
prevent or void the deal
• Good title to all property in deal

4. Representations and
Warranties II: Enforceable
Financials
• Financial statements accurate, current, follow
GAAP
• Real property, capital equipment, other asset
schedules are accurate
• Equipment is in good repair except for
ordinary wear and tear
• All taxes paid, no returns due, no tax
authority liabilities/investigations pending

5. Representations and
Warranties III: Disclosures
• No undisclosed liabilities
• Complete A/R schedule is attached
• Complete A/P schedule is attached
• All taxes paid, no returns due, no tax
authority liabilities/investigations pending
• No questionable payments/illegal operations
• Finders fees for deal n/a or scheduled

6. Representations and
Warranties IV: No Material
Changes
• No material adverse change in business
• No sales not in ordinary course
• No casualty loss beyond defined amount
• No change in managers or other key
employees
• No liability settled or incurred not in
ordinary course

7. Representations and
Warranties V: No Material
Changes, Continued
• No change in a/p outside of ordinary course
• No debt or other obligation beyond $ limit
• No delay of dividend or other capital
return/change of capital structure
• No change in employment contracts or terms
• No other material non ordinary agreements

8. Representations and
Warranties VI: Intellectual
Property
• Company IP (patents, trademarks, copyrights,
trade secrets, etc…) is all current/still protected
• Company owns all IP/no 3d party permission
needed to use same
• No infringement by Company of 3d party IP rights
• No IP royalties or other payments due
• No IP claims or other litigation pending or known

9. Representations and
Warranties VII: Contracts And
Claims
• Complete schedule of material contracts attached
• No lawsuits or administrative actions pending,
settlements in force, judgments due (or scheduled)
• Insurance contracts and schedules are in force as
attached
• No product liability or warranty claims known or likely
• Employee benefit plans and relations good/in
compliance, plans scheduled, no strikes or claims
likely (or scheduled)

10. Part II:
Contract Terms
LIMITING Reps
and Warranties

11. Representations and
Warranties Limits
• Routine Lawyer Argument/Negotiation
• Big Firms Argue For ABA Percentage Loss
Limits For all Reps And Warranties: Small
For No Limits
• Additional Terms To Protect Seller

12. ABA Terms Survey
• Annual Or Biennial Survey
• Deals Covered Usually $10 million plus in
amount/annual sales of companies
involved
• Firms Surveyed Are National/Big Regional
Law

13. ABA Terms Survey 2013
• “Private Target Mergers Deal Points” title
• Working capital adjustments to purchase
price most common adjustment in deals
• Seller earnouts in 25% of 2012 deals
• All liabilities covered in liabilities rep in 77%
of 2012 deals, not just GAAP liabilities

14. ABA Terms Survey 2013
• “Compliance With Law” rep down
significantly (33% of 2012 deals, vs. 77%
2010)
• “Material Adverse Effect” not defined by
dollar amounts in 2012 deals, was earlier
(but see cuffs/collars discussion below)

15. ABA Terms Survey 2013
• “Cuffs” time limit for non-essential representations:
18 months limit in 44% of deals 2012: fraud
usually an exception to time limits
• “Collars” or “Baskets” limited amount recoverable
for non-essential reps/warranty breaches to
%ages of deal (mini-baskets possible for specific
claims within a rep, such as min. $5k/claim)
• De minimis amount of total deal (0.5% or 1%)
often required for any rep or warranty claims

16. ABA Terms Survey 2013
• “Cuffs” time limit for non-essential representations:
18 months limit in 44% of deals 2012: fraud
usually an exception to time limits
• “Collars” or “Baskets” limited amount recoverable
for non-essential reps/warranty breaches to
%ages of deal (mini-baskets possible for specific
reps): 10% overall cap same for 2012, 2010 deals
• De minimis amount of deal (0.5% or 1%) often
required for any rep or warranty claims

17. ABA Terms Survey 2013
• “Cuffs” time limit for non-essential representations:
18 months limit in 44% of deals 2012: fraud
usually an exception to time limits
• “Collars” or “Baskets” limited amount recoverable
for non-essential reps/warranty breaches to
%ages of deal (mini-baskets possible for specific
reps): 10% overall cap same for 2012, 2010 deals
• De minimis amount of deal (0.5% or 1%) often
required for any rep or warranty claims

18. Additional Reps And Warranties
Limits Terms To Protect Sellers
• “No Sandbag”: No relief for items disclosed to
buyer/known to buyer before or during due diligence
• CBS Inc. v. Ziff-Davis Publishing Co., 75 N.Y.2d 496
(1990) a warranty is a promise of indemnity if a
statement of fact is false. A promisee does not have to
believe that the statement is true. Indeed, the
warranty's purpose is to relieve a promisee from the
obligation of determining a fact's truthfulness. “No
Sandbag” eliminates this protection for buyers with
some evidence showing deal problems

19. Purchase Price Escrows To
Protect Buyers
• Escrow Of Purchase Price Amount For
Post-Closing Adjustments/Rep and
Warranty Claims Period
• Amount only average 7.14% of 2012
deals, down from 9+% earlier years:
Amounts in escrow up to $10 million
average for ABA survey deals 2012

20. Part III: Dispute
Resolution
Options

21. Representations And
Warranties Insurance
• 800 or so of 40K plus deals worldwide in
2014: Significant increases year over year
• Common demand in smaller public
company deals, where speed needed
• Premium 2-5% of amount protected,
usually the purchase price

22. Alternative Dispute Resolution
• Arbitration clauses are very common in
business contracts: avoids “home court”
advantage if there is a dispute: Review
where arbitration could occur, too: travel is
expensive
• Only 17% of ABA survey deals made loser
pay arbitration costs

23. Alternative Dispute Resolution
• Some parties leave IP dispute resolution to
courts/USPTO, not inexpert arbitrators
• Note Bunge v. Northern Trust Co (623 N.E.2d 785,
252 Ill.App.3d 485, 191 Ill.Dec. 195, IL Ap. 4 Dist
1993): Courts enforce wording vs drafter of
warranty: General warranty of validity does not
require word “infringement” for patent infringement
to be breach of warranty

24. Fraudulent Transfer Lawsuits
• Later-discovered seller or related party
transfers
• Uniform statute, attorney’s fees and
other relief beyond contract possible
• 2 year statute of limitations (from
event, or discovery of fraud, varies)

25. Sue The Intermediaries
• Business valuation opinions, opinions of
counsel, accounting statements all produce
litigation
• Note Geaslen v. Berkson, Gorov & Levin, Ltd.,
(581 N.E.2d 138, 220 Ill.App.3d 600, 163
Ill.Dec. 187, IL Ap. 5 Dist 1991): Professional
has “duty of care” in preparation of opinion, not
one of investigation beyond scope of opinion

26. Sue Interlopers, Or Win On
Reps And Warranties If Seller
Waffles
• Third parties often decide to take over a seller if they
hear about a deal: CF Texaco v. Pennzoil intentional
interference w. contract tort $8+ billion damages,
punitives
• But CF. Indeck v. Norweb, (735 N.E.2d 649, 316 Ill.
App.3d 416, 249 Ill.Dec. 45, , IL Ap. 1 Dist 2000):
Seller warranty breached when 3d party right of first
refusal (agreement disclosed, not exercise of same)
exercised: no 3d party interference, since just
exercising rights

27. Questions?
William A. Price
Attorney at Law,
www.growthlaw.com
1-800-630-4780
wprice@growthlaw.com