Glossary

Reps and Warranties

Reps and warranties are statements the seller makes about the company at closing, with indemnification consequences if any of those statements turn out to be untrue.

Governance table visual showing a representations and warranties section, disclosure schedule, and indemnification cap card. — Reference layer. Mechanisms under pressure.

Plain definition

What it means.

Reps and warranties (representations and warranties) are statements made by the seller in a definitive purchase agreement about the condition of the company being sold. They cover financials, operations, contracts, employees, intellectual property, litigation, taxes, regulatory compliance, and other material aspects of the business.

If a representation turns out to be untrue, the buyer can claim indemnification under the agreement, typically against the escrow holdback or directly against the seller. The reps are usually qualified by knowledge, materiality, and disclosure schedules. The structure of the qualifiers decides how much exposure the seller carries.

Reps and warranties are the statements the seller stands behind after closing. The agreement decides what the seller has to pay if any of those statements were wrong.

What goes wrong

The failure pattern this term exists to prevent.

The disclosure schedule that did not disclose

The seller assumes a known issue is generally understood. The disclosure schedule does not list it. The buyer treats the omission as a breach. What was assumed to be common knowledge becomes a fully indemnifiable claim.

The materiality scrape

The reps are qualified by materiality. The agreement includes a materiality scrape that strips the qualifier when calculating damages. The seller assumed materiality protected them from minor breaches. The scrape removes that protection at the damages stage.

The fundamental rep that carried no cap

Most reps are subject to the indemnification cap. Fundamental reps, like authority, ownership, capitalization, and tax, are typically carved out from the cap. A single fundamental rep claim can exceed the entire indemnification structure.

The knowledge qualifier that did not protect

A rep is qualified by "to the seller's knowledge." The seller assumes this means actual conscious knowledge. The agreement defines knowledge to include constructive knowledge, knowledge of a defined list of officers, and reasonable inquiry. The qualifier was less protective than it appeared.

Founder questions

The questions people actually ask.

What do reps and warranties cover in a purchase agreement? Reps and warranties cover financial statements, contracts, employees and benefit plans, intellectual property, litigation, regulatory compliance, taxes, environmental matters, and other defined aspects of the business. The list runs to many pages and is heavily negotiated.

What is the difference between fundamental and general reps? Fundamental reps cover authority, ownership of shares, capitalization, and tax. They typically survive longer, are carved out from the indemnification cap, and may not be subject to materiality qualifiers. General reps cover the rest of the business and are usually subject to caps, baskets, materiality qualifiers, and shorter survival periods.

What is a materiality scrape? A materiality scrape is a contractual provision that removes materiality qualifiers from reps when calculating damages. The qualifier still applies for determining whether a breach occurred. Once a breach is established, all losses, including immaterial ones, become recoverable.

How does rep and warranty insurance change the exposure? Rep and warranty insurance shifts a portion of the indemnification exposure from the seller to a third-party insurer. The buyer claims against the policy rather than the seller for covered breaches. It allows for smaller escrows, lower seller exposure, and faster release of holdbacks. Coverage carve-outs and retention apply.

Bigger picture

Where this fits in the structure.

Related structure Escrow Holdback

The escrow exists to make rep-and-warranty indemnification enforceable. The reps decide what the buyer can claim. The escrow decides what the buyer can recover quickly.

Related structure MAC Clause

A MAC clause covers the gap between signing and closing. Reps cover the snapshot at closing. Together they shape the buyer's exit options before, at, and after closing.

Related structure Fiduciary Duty

The seller's reps are also a fiduciary touchpoint. Misstatements in a sale can trigger both contractual indemnification and fiduciary exposure for the people who signed.

Related reading

Read the operating version next.

Related reading

If reps and warranties or the indemnification structure are being negotiated, that is a different conversation.

Bring the draft purchase agreement, the disclosure schedule, and the indemnification structure as proposed.

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