In a sale of securities, the buyer acquires the company along with its past. A tax reassessment relating to an earlier financial year, a latent employment dispute or an overvalued asset may come to light after the acquisition. Representations and warranties - the GAP - are precisely intended to protect the buyer against such discoveries.
What does the seller guarantee?
Through the representations and warranties, the seller makes a number of statements about the situation of the company - accounting, tax, social-security, legal - and undertakes to indemnify the buyer if those statements prove inaccurate, or if a liability originating before the sale later materialises. The warranty thus covers 'liabilities arisen but undisclosed'.
The key parameters
- The cap: the maximum amount the seller may be required to pay;
- The deductible or trigger threshold: below it, the warranty does not apply;
- The duration: the period during which a claim may be brought, often aligned with the tax and social-security limitation periods;
- The terms for calling and notifying claims.
Representations and warranties and acquisition due diligence
Representations and warranties do not dispense with acquisition due diligence; they complement it. Due diligence makes it possible to identify risks before signing and to factor them into the price; the representations and warranties cover the risks that could not be detected or quantified at that stage. Indeed, items revealed by due diligence are often excluded from the warranty, since the buyer was aware of them.
Guaranteeing the guarantee
Representations and warranties are only worth anything if the seller remains solvent and available on the day they are called. To remove this uncertainty, the parties frequently place a portion of the price in escrow: these sums remain blocked for the duration of the warranty and serve, where applicable, to indemnify the buyer. This is what is known as backing the warranty. Here escrow offers a simple and effective security, as an alternative or a complement to a bank guarantee.
Negotiating representations and warranties? Fidens holds the portion of the price that backs them in escrow, on a dedicated CARPA account, and arranges its release in accordance with the agreement.
Frequently asked questions
What are representations and warranties (GAP)?+
It is the undertaking, given by the seller of securities, to indemnify the buyer if a liability originating before the sale comes to light after the closing, or if an asset proves overvalued. It protects the buyer against nasty surprises relating to the company's past.
How long do representations and warranties last?+
The duration is set by the agreement and most often aligns with the tax and social-security limitation periods, the main sources of undisclosed liabilities. A three-year duration is common, and sometimes longer for certain risks.
How can payment under representations and warranties be secured?+
By placing a portion of the price in escrow (backing the warranty) or through a bank guarantee. Escrow immobilises real funds with a trusted third party, available if the warranty is called and released to the seller on expiry.
A transaction to secure?
Fidens sets up the escrow of the price on a CARPA account, under the responsibility of a lawyer.