Reliance on company statement: Overview, definition, and example
What is reliance on company statement?
Reliance on company statement refers to a provision in agreements where one party acknowledges that it is relying on the representations, warranties, or disclosures provided by the company as true and accurate. This clause underscores the importance of the company’s statements in influencing the counterparty's decision to enter into or proceed with the agreement.
For example, in a merger agreement, the buyer may rely on the company’s financial statements, compliance certifications, and disclosures to assess the value of the deal and decide whether to proceed.
Why is reliance on company statement important?
Reliance on company statement is important because it creates a foundation of trust and accountability in business transactions. It ensures that the party providing the statements (e.g., the company) understands the legal and financial significance of its disclosures. For the counterparty, it provides a safeguard in case the statements prove to be inaccurate or misleading, often giving rise to claims for breach of contract or indemnification.
For businesses, this provision emphasizes the need for transparency and accuracy in their representations. For counterparties, it ensures they can make informed decisions based on the company’s statements without assuming unnecessary risks.
Understanding reliance on company statement through an example
Imagine a buyer acquires a manufacturing company based on the seller’s statement that it has no pending environmental violations. After the transaction closes, the buyer discovers unreported violations that result in fines. The buyer may invoke the reliance on company statement clause to claim damages for the seller’s inaccurate representation.
In another example, an investor relies on the financial projections provided by a startup in a term sheet. If the projections are materially inaccurate and were knowingly misrepresented, the investor could seek recourse under the reliance clause.
An example of a reliance on company statement clause
Here’s how a reliance on company statement clause might appear in an agreement:
“The Parties acknowledge that the Investor has relied upon the representations, warranties, and statements made by the Company in this Agreement and any schedules, exhibits, or disclosures provided herein. The Company acknowledges and agrees that the Investor is entering into this Agreement in reliance upon the accuracy and completeness of such representations and warranties.”
Conclusion
The reliance on company statement provision ensures that representations and disclosures are treated as integral to the decision-making process of the counterparty. For companies, it underscores the importance of providing accurate and complete information. For counterparties, it provides protection and recourse if the statements prove to be false or misleading. Including this provision in agreements promotes transparency, trust, and accountability in business 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.