deal-structures
Representations and warranties are contractual statements about the company — accounts, contracts, tax, employees, IP — that allocate unknown risk. If they are wrong, the buyer has a claim, subject to caps, baskets and disclosure.
Representations and warranties are how a private SPA or APA says “this is the company you think you bought.” Typical coverage: organisation and shares, accounts, no undisclosed liabilities, tax, material contracts, IP, employees, litigation, data protection, and (sometimes) the information in the data room.
The seller’s defence is disclosure: a disclosure letter or schedules that qualify the warranties. What is fairly disclosed usually cannot be sued. That is why the quality of the room and the disclosure letter is part of legal due diligence, not an afterthought.
Market practice (not law) often includes a de minimis, a basket (tipping or deductible), a cap lower than the purchase price, and survival periods that are shorter for general warranties than for title, tax and fundamental warranties. Warranty and indemnity (W&I) insurance can replace much of the seller’s residual risk for a premium, which private equity sellers use to distribute cash at closing.
Escrow is the cash collateral for the same regime. It is not a substitute for the warranties themselves.
General warranty cap 20% of price, 18-month survival, €100k basket. Title and tax uncapped relative to general warranties, longer survival. A customer-concentration fact is in the CIM but not in the disclosure letter against the “no customer >10%” warranty. After close the top customer leaves. The fight is disclosure quality, not whether the customer left.
Buyers want knowledge qualifiers only where the seller truly cannot know. Sellers want “so far as the warrantors are aware” everywhere. Management warrantors want personal caps. Funds want no surviving liability beyond W&I.
Warranting the future (that is an earnout or a covenant). Data-room dump as “deemed disclosure” without an index. No knowledge group definition. Assuming W&I covers known issues.
Warranties do not make a bad business good. Recovery is slow. Fraud claims, where available, sit outside the neat cap structure and are harder to run.
Disclosure quality tracks information quality. A structured company layer — contracts, financials, people, claims — produces a disclosure letter that actually matches the warranties, which is the only way W&I underwriters and buyers will trust the pack.