reps and warranties

What are Reps and Warranties?

Representations and warranties, often shortened to “reps and warranties”, are statements and assurances made by the seller during mergers and acquisitions (M&A). They form part of the purchase agreement and help allocate risk between the buyer and seller.

In simple terms, reps and warranties give the buyer confidence that the business is as described. If those statements later prove inaccurate, the buyer may have the right to bring a claim for losses suffered after the deal closes.

They are one of the most heavily negotiated parts of an M&A agreement because they affect liability, valuation and post-deal risk.

What is the difference between representations and warranties?

Although the terms are often grouped together, they are separate elements:

  • A representation is a statement of fact made by the seller to persuade the buyer to enter into the transaction. For example, the seller may state that the company owns all shares in a subsidiary or that there is no ongoing litigation.
  • A warranty is a contractual promise that certain statements about the business are true. If a warranty proves incorrect, the buyer may seek compensation under the agreement.

In practice, many jurisdictions treat the concepts similarly during M&A negotiations, which is why they are usually discussed together.

Why are reps and warranties important?

M&A transactions involve information asymmetry. Sellers know far more about the business than buyers do.

Reps and warranties help reduce this imbalance by forcing the seller to confirm important facts about the company formally and contractually. They also encourage disclosure. If a seller cannot give a warranty confidently, they may need to disclose an issue to the buyer before completion.

This process helps:

The broader or riskier the transaction, the more extensive the reps and warranties package tends to become.

Common categories of reps and warranties

Category

Examples

Corporate matters

Ownership structure, authority to sell, share capital

Financial statements

Accuracy of accounts, absence of undisclosed liabilities

Legal compliance

Regulatory compliance, licences and permits

Contracts

Validity of material agreements and obligations

Employment matters

Employee disputes, pensions and benefits

Intellectual property

Ownership of trademarks, patents and software

Data protection

GDPR compliance and cybersecurity incidents

Tax matters

Tax filings, liabilities and audits

How do reps and warranties work in practice?

The buyer’s legal team drafts a list of reps and warranties covering key risk areas. The seller then reviews them carefully and may qualify certain statements through a disclosure letter. For example, the seller may disclose that a minor legal dispute exists even though the warranty states there is no material litigation.

This disclosure process is important because it limits future liability. If the buyer was informed about an issue before completion, it becomes harder to claim later that the matter was hidden.

The agreement will also define:

  • Financial liability caps
  • Time limits for claims
  • Materiality thresholds
  • Knowledge qualifiers such as “to the seller’s best knowledge”
  • Fraud exceptions.

Reps and warranties vs indemnities

Reps and warranties are different from indemnities.

Reps and warranties

Indemnities

Broad statements about the business

Protection for specific known risks

Usually require proof of breach and loss

Often provide direct reimbursement

Support due diligence and disclosure

Allocate responsibility for identified liabilities

Standard across most transactions

Used selectively for particular issues

For example, an indemnity may specifically cover an ongoing tax investigation identified during due diligence.

The role of due diligence

Due diligence and reps and warranties are closely connected. Buyers use due diligence to test whether the seller’s statements are accurate, while sellers use disclosures to manage and limit liability.

A virtual data room (VDR) plays an important role in this process by storing disclosures, supporting evidence and transaction records securely. Audit trails inside the VDR can later help prove:

  • What information was disclosed
  • When documents were shared
  • Which parties accessed them

This evidence can become important in post-deal disputes.

Reps and warranties insurance

Many larger transactions now use reps and warranties insurance (RWI). This insurance covers certain losses arising from breaches after completion. Companies use RWI to:

  • Reduce seller liability exposure
  • Support smoother negotiations
  • Minimise post-deal disputes
  • Allow private equity sellers to achieve cleaner exits

The use of RWI has increased significantly in cross-border and private equity transactions.

Manage your M&A deals with confidence

Admincontrol’s virtual data room provides recommended folder structures that you can tailor to get your VDR up and running quickly when a deal starts to move. Use the encrypted Q&A function to keep conversations private and advanced keyword matching to find the document you need when you need it.  

Learn more

[a]@delphine@sorted.co French link: https://www.corporatesolutions.euronext.com/fr/blog/data-room-virtuelle