Contract Adviser Business Law Blog

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    Hello Entrepreneurs!

    My name is Lawrence Hsieh. I am a corporate attorney and author of the Small Business Contracts Handbook, to be published by Self-Counsel Press. I am also the author of the Contract Adviser Business Law Blog, located at http://contractadviser.com/blog/. I update the blog frequently to post practical and common sense insight about business contracts for entrepreneurs and small business.

    Here is a sample posting from my blog about representations and warranties found in business contracts....

    "A representation is a statement of fact made in a business contract by one party to induce the other party to enter into the transaction. In a sale of business transaction (whether an asset or entity sale), the seller makes a litany of representations about the business it's selling (and about its ability to enter into the transaction) to induce the purchaser to buy the business.

    In today's column, I'm going to focus on the "Compliance with Laws" representation that a seller of a business makes in a sale of business transaction.

    The typical buyer isn't going to want to take over (or pay full price for) a business that it thinks may be breaking the law. The seller makes the "Compliance with Laws" representation to assure the buyer that the company isn't in violation of any law or regulation.

     

    The parties typically spend quite a bit of time negotiating the wording of this representation.

     


    The buyer would like the seller to make the representation "flat", that is, without qualification.

     


    Here is a variation of a standard "flat" Compliance with Laws representation (asset purchase version).

     


    "The Seller is not in breach or violation of any..... law, regulation or other rule of any government authority or ruling or other determination of any court or other tribunal to which the Seller, or with respect to which any of its assets or business, is subject."

     


    Most sellers, on the other hand, want to qualify this representation with wording that minimizes the risk that it might be making a misrepresentation.

     


    List the Exceptions -

     


    "Except as set forth in attached Exhibit A, the Seller is not in breach or violation of any..... law, regulation or other rule of any government authority or ruling or other determination of any court or other tribunal to which the Seller, or with respect to which any of its assets or business, is subject."

     


    In the revised representation, the seller would list all the violations in an exhibit to be attached to the asset purchase agreement. Note that this method is only as accurate as the memory of the seller. If the seller forgets to list a violation, then it's a misrepresentation. For the seller, this version (although better than a flat representation) is still not so forgiving.

     


    Knowledge Qualifier -

     


    "To the best of its knowledge, the Seller is not in any breach or violation of any..... law, regulation or other rule of any government authority or ruling or other determination of any court or other tribunal to which the Seller, or with respect to which any of its assets or business, is subject."

     


    In the revised representation, the seller makes a misrepresentation only if it was aware of the violation (or should have been aware of the violation after making at least a reasonable inquiry).

     


    Materiality Qualifier -

     


    "The Seller is not in any material breach or violation of any..... law, regulation or other rule of any government authority or ruling or other determination of any court or other tribunal to which the Seller, or with respect to which any of its assets or business, is subject."

    In my next post, I'll explain how the placement of the word "material" in the representation can have a dramatic dilutive impact on the meaning of the representation, and discuss commonly negotiated compromise language for this representation."

    The above information, and information contained in my blog, are not intended to constitute legal, accounting or professional advice. If you require legal or other expert assistance, then you should seek the services of a licensed professional in your area. Thank you, and Good Hunting!