August 12, 2003
SURPRISE FINDINGS REGARDING THE “ACCURACY
SURPRISE FINDINGS REGARDING THE “ACCURACY OF REPS AND WARRANTIES” CONDITION IN ACQUISITION AGREEMENTS! URBAN LEGEND REGARDING BUYER’S WALK RIGHT SENT PACKING AT THE ABA NEGOTIATED ACQUISITIONS COMMITTEE MEETING IN SAN FRANCISCO!”
One section of most acquisition agreements that can control when a buyer can walk a deal, usually entitled “Accuracy of Representations and Warranties” (in M&A slang, the “bring down” section) has long been the subject of debate for a lot of reasons. One of the principal debates is whether practitioners require that the reps and warranties be correct (i) only at signing (i.e., “true when made”), (i) only at closing (i.e., “as brought down”), or (iii) at both signing and closing(i.e., “true when made and as brought down”). As an extension of our recent Deal Points Study, wherein we reviewed acquisition agreements relating to public company acquisitions of private companies with transaction values of between $25M and $150M (pulled from the LiveEDGAR M&A Database), we compiled the following statistics about when reps and warranties have to be true:
True at signing only (i.e., “true when made”): 7%
True at closing only (i.e., “as brought down”): 48%
True at signing and closing (i.e., “true when made and as brought down”): 45%
From a statistical standpoint it looks fairly evenly matched between “true at closing only” and “true at signing and closing.” Depending on which side of the buyer/seller aisle you sit these findings may be as big of a surprise to you as they were to a lot of our colleagues (and us too) on the ABA Negotiated Acquisitions Committee.
Can sellers and buyers call it a draw in the bring down arena? Hard to tell without analyzing other key features of this particular walk right. So with that teaser, tune in again over the next several days for more of these dramatic statistical findings on the all important bring down condition, including those related to “materiality” (a/k/a How wrong can the seller be?).
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