Introduction
Representations and warranties (R&Ws) are one of the key anchors in every mergers and acquisitions (M&A) transaction. Although they are a customary feature of a share purchase agreement (SPA), they are rarely straightforward. They are amongst the most heavily negotiated terms in any deal and frequently become the focal point of post-closing disputes.
R&W in transaction documents address a fundamental challenge that exists in every acquisition, which is information asymmetry. The seller is aware of the business in detail; the buyer is making an investment based on information provided to it through disclosures, diligence materials, management presentations, and contractual assurances. Representations are statements about the current or historical condition of the business, while warranties are contractual promises that those statements are accurate. Together, they provide the framework through which risk is allocated between the contracting parties if those statements later prove to be incorrect. R&Ws influence purchase price negotiations, shape the scope of legal due diligence, affect financing arrangements, and determine the remedies available when problems emerge after closing.
Misrepresentation and the limits of disclosure
1. The primary purpose of R&Ws is to ensure that the buyer acquires the business based on accurate and complete information. When information provided during the transaction process proves to be inaccurate, the buyer’s ability to seek recourse generally depends on the contractual protections contained under the SPA.
2. Misrepresentations can arise in many forms. Undisclosed liabilities, inaccuracies in financial statements, unreported litigation, regulatory compliance failures, deficiencies in intellectual property ownership, or material contractual disputes can all affect the value of the target business. Even relatively small inaccuracies may become significant if they reveal broader operational or governance issues. Sellers typically seek to narrow the scope of their exposure through carefully drafted disclosure schedules, exceptions, and qualifications. Buyers, on the other hand, seek broad and unqualified assurances wherever possible. The resulting compromise often determines whether a buyer will have a meaningful remedy if problems emerge after completion.
3. One of the recurring tensions in M&A negotiations concerns the distinction between ordinary mistakes and deliberate concealment. While parties may agree to allocate the risk of innocent errors, they are far less willing to tolerate intentional misstatements or omissions. Consequently, the treatment of fraudulent conduct remains one of the most sensitive aspects of R&W negotiations and often influences how limitation provisions are drafted throughout the agreement.
Sandbagging and the role of due diligence
1. Few issues generate more debate in M&A transactions than the question of whether a buyer can bring a claim for breach of warranty when it knew about the problem before closing. This issue, commonly referred to as “sandbagging”, arises because due diligence rarely produces perfect results. Buyers frequently discover potential issues during the investigation process but may nonetheless decide to proceed with the transaction for commercial reasons. The question then becomes whether that prior knowledge should affect the buyer’s ability to rely on contractual warranties after closing. Those who favour a pro-sandbagging approach argue that R&Ws are contractual promises that should remain enforceable regardless of what the buyer discovered during diligence. According to this view, the seller chose to make the representation and should bear responsibility if it proves inaccurate. A counterargument is that a buyer who knowingly proceeds despite identifying a problem should not later be permitted to seek compensation for the same issue. In their view, allowing such claims effectively rewards strategic behaviour and undermines the purpose of due diligence.
2. Buyers generally seek to preserve maximum flexibility by retaining their right to claim regardless of prior knowledge, while sellers seek certainty that known issues have been resolved before closing. Because legal approaches vary across jurisdictions, sophisticated transaction documents increasingly address the issue expressly. Whether a deal adopts a pro-sandbagging or anti-sandbagging position often depends on the bargaining power of the parties, the results of due diligence, and the overall risk profile of the transaction.
Limitations of liability
1. The practical value of any R&W is ultimately determined by the liability framework that supports it. Even the broadest warranty may provide little real protection if the seller’s liability is heavily restricted. For that reason, negotiations concerning caps, baskets, thresholds, and survival periods are often more important than the wording of the representations themselves. Most SPAs contain several layers of limitation. De minimis thresholds exclude claims below a specified amount. Basket provisions require losses to exceed an agreed threshold before recovery becomes available. Liability caps impose an overall ceiling on the seller’s exposure. These mechanisms serve legitimate commercial purposes. Sellers understandably seek protection against minor claims and open-ended liability. Buyers, however, are concerned that excessive limitations may undermine the protections they negotiated elsewhere in the SPA.
2. Survival periods create an additional layer of complexity. Most warranties remain enforceable only for a specified period after closing. General business warranties often survive for a relatively short period, while fundamental matters such as ownership, authority, and taxation typically survive longer. These limitations are not merely procedural. They define the extent of the seller’s post-closing obligations and frequently determine whether a buyer has any practical remedy at all. As a result, they often become some of the most intensely negotiated provisions in the transaction.
Exclusive remedies and the rise of R&W insurance
1. Another increasingly important aspect of M&A transactions concerns the remedies available when R&Ws are breached. Many SPAs include exclusive remedy provisions that restrict the buyer’s recourse to the contractual indemnification framework contained in the agreement. From a seller’s perspective, these provisions provide certainty and help avoid multiple forms of litigation arising from the same issue. For buyers, however, exclusive remedy provisions can be problematic where negotiated limitations leave them undercompensated. If liability caps, baskets, or survival periods significantly restrict recovery, the buyer may have limited options for addressing substantial losses.
2. This concern has contributed to the growing popularity of R&W Insurance (RWI). RWI policies are designed to cover losses arising from breaches of R&W, subject to policy limits and exclusions. By introducing an insurer into the risk allocation structure, parties can often reduce the intensity of indemnity negotiations while preserving meaningful protection. For sellers, insurance can facilitate a cleaner exit by reducing post-closing exposure. For buyers, it provides an additional source of recovery that is not dependent solely on the seller’s willingness or ability to satisfy claims. The increasing use of RWI has transformed many transactions, particularly those involving private equity sponsors and cross-border investors. As the market continues to evolve, insurance is likely to play an even greater role in shaping the negotiation of R&W.
Conclusion
R&Ws remain one of the most important components of any M&A transaction because they sit at the intersection of information, risk, and value. They determine not only what the seller is promising about the business but also who bears the financial consequences if those promises to prove inaccurate. The key issues that arise in this context—misrepresentation, sandbagging, liability limitations, knowledge qualifiers, materiality standards, exclusive remedies, and insurance — are not simply technical, legal concepts; they are practical tools through which parties negotiate the allocation of commercial risk.
Ultimately, effective R&W provisions require more than careful drafting. They require a clear understanding of the business being acquired, a realistic assessment of potential risks, and a thoughtful approach to allocating responsibility between the parties. When negotiated properly, they create certainty and facilitate successful transactions. When overlooked or poorly drafted, they can become the source of costly and prolonged disputes long after the deal has closed. In modern M&A practice, R&Ws are not merely contractual protections. They are the framework through which trust is translated into enforceable obligations and through which the economic bargain between buyer and seller is ultimately preserved.
*Partner, Fox & Mandal.
**Associate, Fox & Mandal.
