The “Representations and Warranties” in the company purchase and sale contract.
It is another of the basic documents in any process of Sale of companies, also called “Representations and Warranties.”.
When a company is acquired, via purchase of the shares or participations representative of its share capital, what the buyer receives, regardless of the supporting title of said operation, is the set of assets and liabilities of the same, are, or not, recorded in the balance sheet at the closing of the transaction.
That is to say, the acquirer is responsible for all the rights and obligations derived from the activity of the company object of the sale, until the date of the transaction. In consecuense, It will be the buyer's responsibility to ensure the reality of what they purchase, of the past responsibilities that may arise and the set of liabilities.
Similarly, will be the seller's responsibility for any vices or defects that the thing sold may have or present. That responsibility will always be, is regulated, or not, in the terms of the sale contract.
Before that situation, arises the convenience of conducting a deep Due Diligence, rigorous research, on the key areas of the Company: financial, relative to the progress of the business in which they have an interest; legal, on compliance with legal obligations, both formal and substantive; tax and employ situation, aimed at verifying compliance with tax regulations and Social Security contributions; as well as other reviews related to the proper ownership of the assets that the company owns and that appear in its balance sheet.
We agree, so, that the review carried out in the process of Due Diligence, Helps to better understand the reality and reduce the risks and uncertainties of the operation, but not to eliminate them completely.
Thus, it is usual practice, that the company sales contract incorporates a clause of Representations and Warranties whose purpose is none other than reinforce the buyer of the veracity of what he buys and, especially, of the seller's response to any contingent asset or liability.
The buyer wants than, within the framework of the freedom and autonomy of the parties, the seller reiterates the legitimate possession of what he transmits; the veracity of the Company's accounts and that they reflect the Faithful image Of the same; the absence of commitments or contracts other than or outside the ordinary course of business; non-compliance with commitments or contracts; the absence of litigation other than those known and related in the contract; the faithful observance of all the tax obligations and those related to Social Security ... etc.
As a last resort, the purpose of Representations and Warranties it is, in those made by the seller, in favor of the buyer, avoid damages or losses that may eventually be suffered by vice in the consent derived from the falsity of the statements of that. It is in this context that the buyer makes, also, certain statements that will haunt prove that it carries out the purchase and sale operation based on the veracity of the Representations and Warranties made by the seller.
Recognized the importance of the clause of “Representations and Warranties” the essential, from that own recognition of the Parties, lies in the proper regulation in the claim mechanism contract, First, and the application of the guarantees given based on the veracity of what is declared, then. That is to say, in how to act in the event of possible consequences caused by falsehoods or inaccuracies that may generate a certain loss for the buyer.
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ATICA BUSINESS BROKERS, business law specialists, sale of companies and business investment.
