Engagement of asset representations reviewer: Overview, definition, and example
What is the engagement of an asset representations reviewer?
The engagement of an asset representations reviewer refers to the process by which a third-party professional is hired to review the representations and warranties related to assets in a transaction, typically in mergers, acquisitions, or financing deals. This review is essential for verifying the accuracy and completeness of the statements made by the seller or the party providing the assets about the condition, ownership, and legal standing of those assets.
An asset representations reviewer conducts due diligence to ensure that the representations made regarding the assets being sold, transferred, or used as collateral are true and in accordance with the terms of the contract. This reviewer is typically an independent auditor, legal firm, or a specialist in the relevant industry, and their findings help to mitigate risk and ensure that the transaction proceeds without significant legal or financial complications.
Why is the engagement of an asset representations reviewer important?
The engagement of an asset representations reviewer is crucial for ensuring the integrity and accuracy of the asset-related claims made during a transaction. These reviews provide the buyer or lender with confidence that the assets are as represented, free from undisclosed liabilities, and comply with all necessary legal or regulatory standards.
By hiring a qualified and independent third party to perform this review, businesses can prevent issues such as fraud, misrepresentation, or unforeseen liabilities that could undermine the value or legality of the assets involved. The reviewer helps protect both parties in the transaction, especially the buyer or lender, by identifying potential risks before the deal is finalized.
Understanding the engagement of an asset representations reviewer through an example
Let’s say a company is acquiring another company, and part of the deal involves the purchase of real estate assets. The seller provides a set of representations regarding the condition of the properties, such as ownership, zoning compliance, and the absence of legal disputes. To ensure that these representations are accurate, the buyer hires an asset representations reviewer—a real estate auditor—to independently verify the claims made by the seller.
The reviewer might conduct a thorough investigation of the property titles, check for any pending legal issues, confirm zoning regulations, and assess the condition of the property. If the reviewer finds discrepancies or issues that the seller did not disclose, the buyer can use this information to renegotiate the deal or address potential risks before proceeding.
In a financing context, a lender might engage an asset representations reviewer to verify that the collateral offered by a borrower is legally owned, free of encumbrances, and in good condition, reducing the risk of lending.
Example of an engagement of asset representations reviewer clause
Here’s how an engagement of asset representations reviewer clause might appear in a contract:
“The Buyer shall engage an independent asset representations reviewer to verify the representations and warranties related to the assets being transferred under this Agreement. The review shall include, but is not limited to, verifying ownership, legal status, compliance with applicable laws, and the absence of undisclosed liabilities. The Buyer shall have the right to terminate the Agreement or adjust the terms of the transaction if the asset representations reviewer identifies material discrepancies or risks in the asset representations.”
Conclusion
The engagement of an asset representations reviewer is a critical part of the due diligence process in any asset-based transaction. By verifying the accuracy of the asset representations made by the seller or borrower, this third-party reviewer helps to reduce the risks of misrepresentation, fraud, or hidden liabilities. This independent review provides confidence to the buyer or lender, ensuring that the transaction is based on accurate and reliable information. Engaging an asset representations reviewer is an effective way to safeguard against potential legal and financial issues in asset-based transactions.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.