Representations and warranties of selling shareholders: Overview, definition, and example
What are representations and warranties of selling shareholders?
Representations and warranties of selling shareholders are statements made by shareholders who are selling their shares in a company—typically in a stock purchase agreement or merger agreement. These statements confirm specific facts about the shares being sold, the authority to sell them, and the absence of issues such as undisclosed liabilities, pending litigation, or ownership disputes. They help the buyer assess risk and serve as a legal foundation for recourse if any statements turn out to be false.
Why are representations and warranties of selling shareholders important?
These representations and warranties are important because they give the buyer confidence that the seller is legally entitled to sell the shares and that the company being acquired is in the condition represented. They also help allocate risk between the parties—if the representations are inaccurate and the buyer suffers a loss, the buyer may be able to seek damages or other remedies. This legal structure builds trust in the transaction and creates a clearer path for enforcement if things go wrong.
Understanding representations and warranties of selling shareholders through an example
In a private company acquisition, the selling shareholders might be asked to confirm that they own the shares free of liens, that they have the corporate authority to enter the agreement, and that there are no pending lawsuits against them relating to the shares. If, after closing, it’s discovered that one shareholder was involved in a legal dispute over ownership of their shares, the buyer could potentially bring a claim under the breached warranty.
Example of how representations and warranties of selling shareholders may appear in a contract
Here’s how a typical section of representations and warranties may appear in a share purchase agreement:
"Each Selling Shareholder hereby represents and warrants to the Buyer that: (a) they are the sole legal and beneficial owner of the Shares being sold, free and clear of any liens or encumbrances; (b) they have full power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby; and (c) there are no actions, suits, or proceedings pending or, to their knowledge, threatened against them relating to the ownership or transfer of the Shares."
Conclusion
Representations and warranties of selling shareholders are a key component of share sale transactions, offering legal assurances about ownership, authority, and the absence of hidden risks. They help protect the buyer and clarify the obligations of the sellers. Both sides should carefully negotiate and review these statements to ensure they are accurate, fair, and tailored to the specifics of the transaction.
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.