What are Representations and Warranties?

Whether you are aware of it or not, you have likely entered into a transaction where representations and warranties were made. This weekend, for example, I purchased a Craftsman hand-held power tool. It came with a 3 year limited warranty (“For three years from the date of sale, the product is warranted against defects in material or workmanship.”), which gave me the confidence to make the purchase. And that is precisely the purpose of this section in a stock purchase agreement. Except that you are buying a company instead of a power tool, and this same logic must be applied to a highly unique operating entity. Also, millions of dollars are at stake. 

How This Is Accomplished: Think of the representations in this section as promises that certain statements about the company are true, and think of the warranties as a promise to protect the buyer in the event that these statements are not true. In the event that a representation made is inaccurate, the buyer knows that they can be made whole for the associated loss (we will cover this in detail under Indemnification).
We will explore this in far greater detail in the next two posts, which will cover both the Representatins and Warranties of the Seller and the Representations and Warranties of the Buyer. Please click on the links below to continue.