Asset purchase, merger, stock sale—no matter what kind of deal you’re doing, there will always be the risk of assuming unknown liabilities. Erik Lopez in a recent post says whether it’s insolvent sellers, omitted assets or liens on stock, there is a lot that could go wrong.
But he notes there are ways to protect yourself and your company from these risks and offers up some approaches to limiting deal liability:
- Representations and Warranties: These are statements of past and present fact as they relate to the business, its assets and liabilities, among other things. Typically, they’re contained in the principal agreement of the transaction and, if inaccurate, could result in liability for the party making the statement. Subjects such as inventories, assets, real property and tax matters generally can be addressed this way.
- Certifications: There are two separate certifications that are delivered during the deal’s closing: officer’s certificates and secretary’s certificates. Generally, an officer’s certificate tells the buyer that the representations and warranties are true and pre-closing covenants have been complied with. The secretary’s certificate guarantees the officers have the authority to make the deal, says Lopez, noting these offer “an additional layer of protection.”
- Indemnification Rights: “M&A indemnification rights, among other things, entitle you to be compensated by the seller for losses you incur on account of a breach of any of the seller’s representations, warranties and covenants,” he says. Or, in plainer language, if the business is worse than you expected, you may be able to recover damages based on these rights.