Whenever a client is provided a copy of a proposed agreement for the sale of the business, the client generally goes first to the sections dealing with the amount of consideration to be paid for the business and how it is to be paid. And it is certainly easy to understand that inquiry is of prime importance to the seller. But it takes some effort to have the client focus on more important parts of the sale agreement, such as the section on seller representations and warranties and the section on indemnification. This blog will focus on seller representation and warranties. Seller indemnities will be dealt with in a subsequent blog.
This part of the sale agreement can be very lengthy, often consuming ten or more pages, which most sellers find very tedious to wade through. It is always a persistent effort to walk through the sections dealing with these representations and warranties one by one. The point we try to impress is that if there is a lawsuit post-closing, it often revolves around the allegation by the buyer of a breach of a representation or warranty contained in the agreement by the seller and/or the selling owner.
The other point we try to impress on the client is that disclosure is key. For example, a representation and warranty that there are no lawsuits pending or threatened or even circumstances that could lead to the possibility of a lawsuit from any facts known to the seller at the time can be easily dealt with to avoid an alleged breach later by adding language in that section stating “except as provided in Schedule _,” along with an explanation in the governing schedule to the agreement referencing that particular incident and making an appropriate disclosure.
A client had a situation where an employee was terminated for cause, but she retained an attorney threatening a lawsuit that she was terminated for other reasons. The seller responded to the departed employee’s lawyer in detail substantiating cause for termination and that it was not for the reason alleged. The client said that no word had been received back in several months, and he assumed that she was dropping the matter. Our advice to the client was to disclose this incident in the schedule pertaining to that particular representation and warranty. Then if the matter popped up after the closing, the client would have made the necessary disclosure precluding an allegation that there had been a breach of that representation by a failure to make a proper disclosure.
Michael W. Margrave