What representations and warranties will a company have to make in an acquisition?
Takeaway: In startup acquisitions, sellers are required to make accurate representations and warranties about various aspects of their business, including organizational structure, capitalization, financial statements, legal compliance, intellectual property, contracts, litigation, tax matters, and employee details. Buyers are typically indemnified for certain inaccuracies in the representations and warranties.
In the context of a startup acquisition, representations and warranties play a crucial role in providing the acquiring party with a clear picture of the business they are buying. They serve to disclose information, allocate risk, and set the stage for potential indemnification claims if any of these representations and warranties turn out to be untrue.
What are Representations and Warranties?
Representations and warranties are essentially statements of fact about the state of the business. They cover a broad spectrum of the company's operations and can touch upon the company's finances, legal compliance, intellectual property, contracts, employees, and more.
Key Representations and Warranties in Startup Acquisitions
Organization and Good Standing: The selling startup typically must represent that it is a duly formed and validly existing entity under the laws of its jurisdiction of incorporation, and that it has full corporate power to carry on its business as presently conducted.
Capitalization: The startup must disclose the complete details of its capital structure, including the number and types of its issued and outstanding shares of stock, options, warrants, and other securities.
Financial Statements: The startup will often need to provide financial statements that are accurate, complete, and prepared in accordance with generally accepted accounting principles (GAAP).
Compliance with Laws: The startup should provide assurance that it is in compliance with all applicable laws and regulations.
Intellectual Property: Startups usually warrant that they own or have sufficient rights to all of their IP, that the IP does not infringe upon the rights of any third party, and that there are no outstanding disputes related to the IP.
Contracts: The startup should affirm that all of its contracts are valid, enforceable, and in good standing, and that there are no breaches or defaults on the part of any party.
Litigation: The startup will need to disclose any current, pending, or threatened litigation, investigations, or claims.
Tax Matters: The startup needs to confirm that it has properly filed all required tax returns and paid all taxes due.
Employees and Benefits: The startup should disclose information about its employees, their contracts, any labor disputes, and the details of any employee benefits plans.
Conclusion
Remember, the buyer relies heavily on these representations and warranties when deciding whether to proceed with the acquisition, and any breach of these can lead to heavy legal consequences. Therefore, it's crucial for the selling startup to ensure that all these declarations are accurate and truthful. It's highly recommended to work with a knowledgeable attorney during this process.