Representations and warranties true at closing: Overview, definition, and example
What are representations and warranties true at closing?
Representations and warranties true at closing refer to statements made by a party (usually the seller in a transaction) within a contract that describe the current state of affairs or the condition of certain facts, and these statements must remain accurate and true at the closing of the transaction. In the context of a merger, acquisition, or other business transaction, the buyer and seller typically make representations and warranties about their respective businesses, financial status, assets, liabilities, legal compliance, and other relevant matters.
The "true at closing" aspect means that all the representations and warranties made by the parties must be accurate and up-to-date at the time the transaction is finalized, or "closed." If it is discovered that any of the representations and warranties are no longer accurate by the closing date, this can lead to legal remedies, including renegotiation of the deal, price adjustments, or even the termination of the transaction.
Why are representations and warranties true at closing important?
Representations and warranties true at closing are important because they provide a basis of trust and confidence between the parties involved in the transaction. They ensure that both the buyer and seller are entering into the deal based on accurate and truthful information. If any of the representations or warranties turn out to be false or misleading at the time of closing, the innocent party (often the buyer) may be entitled to remedies, such as price reductions, indemnities, or even the cancellation of the agreement.
For buyers, having accurate representations and warranties confirmed at closing is crucial because it protects them from acquiring a business or assets with undisclosed liabilities, risks, or financial issues. For sellers, ensuring the representations and warranties are true helps prevent future disputes or claims arising from the sale.
Understanding representations and warranties true at closing through an example
Imagine a company, ABC Corp., is selling its assets to XYZ Ltd. As part of the sale agreement, ABC Corp. makes certain representations and warranties about the state of its business, including the accuracy of its financial statements, that it owns the assets being sold, and that there are no pending lawsuits or legal disputes.
At closing, XYZ Ltd. relies on these representations and warranties to finalize the deal. If, after the sale, XYZ Ltd. discovers that ABC Corp. understated its liabilities or failed to disclose a pending lawsuit that affects the assets being sold, XYZ Ltd. may have legal grounds to seek a remedy because the representations and warranties made by ABC Corp. were not true at closing.
In another example, a real estate transaction occurs in which a seller represents that the property is free from environmental hazards. If, at closing, it is discovered that the property has an undisclosed environmental issue, the buyer may seek a reduction in price or compensation because the seller's representation was not true at the time of closing.
An example of a representations and warranties true at closing clause
Here’s how a representations and warranties true at closing clause might appear in a purchase agreement:
"The Seller represents and warrants to the Buyer that all statements, documents, and information provided in connection with this Agreement are true, accurate, and complete as of the date of this Agreement and will remain true, accurate, and complete as of the closing date. The Seller further represents and warrants that no material changes, omissions, or misstatements have occurred between the execution of this Agreement and the closing date that would materially affect the transaction."
Conclusion
Representations and warranties true at closing are critical to ensuring that all parties involved in a transaction are operating on the basis of accurate and reliable information. They help protect the buyer from acquiring assets with undisclosed risks or liabilities and provide legal recourse if any of the statements made are found to be false or misleading at the time of closing. These provisions are a key element of due diligence in mergers, acquisitions, and other business transactions, ensuring both parties are held accountable for the truthfulness of their claims up to the point of finalizing the deal.
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.