Reps and Warranties

What Are Reps and Warranties?

Representations and warranties — commonly abbreviated as “reps and warranties” or “R&W” — are contractual statements embedded in M&A purchase agreements. Representations are assertions of existing fact (“the financial statements are accurate”), while warranties are assurances that those facts will remain true (“the company is in compliance with all applicable laws”).

In practice, the distinction between representations and warranties is often blurred, and the terms are used together. Their primary function is to allocate risk: if a representation proves untrue, the buyer may be entitled to indemnification from the seller (Corporate Finance Institute).

Common Categories

Reps and warranties in a typical share purchase agreement cover:

Fundamental Representations

These are considered so essential that they typically survive indefinitely and are not subject to caps or baskets:

• Authority and capacity — the seller has the legal right to enter into the transaction
• Title to shares — the seller owns the shares free of encumbrances
• Organisation — the target is validly incorporated and in good standing
• Capitalisation — the share capital is as described, with no undisclosed options or warrants

Business Representations

Subject to negotiated survival periods, caps, and baskets:

• Financial statements — prepared in accordance with applicable accounting standards and fairly presenting the company’s financial position
• Absence of undisclosed liabilities — no material liabilities beyond those reflected in the financial statements or disclosed
• Material contracts — all material agreements have been disclosed, are in full force, and are not in breach
• Tax compliance — all returns filed, all liabilities paid, no ongoing disputes
• Litigation — no pending or threatened proceedings that could have a material adverse effect
• Employees and benefits — accurate employee information, compliance with employment laws, no undisclosed obligations
• Intellectual property — the company owns or has valid licences for all IP used in its business
• Environmental compliance — no contamination, no violations, no remediation obligations
• Insurance — adequate coverage in place, no pending claims that could affect coverage
• Regulatory compliance — all necessary licences and permits are current and in good standing

Disclosure Schedules

Each representation is typically qualified by a disclosure schedule — a companion document where the seller lists exceptions. Thorough due diligence helps buyers assess whether disclosure schedule exceptions are complete. For example, the litigation representation might state “there are no pending proceedings except as set forth in Schedule 4.12.” The breadth of disclosure schedule exceptions is a key negotiation point.

Negotiation Dynamics

Seller’s Perspective

• Narrow the scope of each representation to reduce exposure
• Qualify representations with materiality and knowledge qualifiers (“to the seller’s knowledge”)
• Maximise disclosure schedule exceptions
• Limit survival periods and cap indemnification liability
• Consider reps and warranties insurance (RWI) to shift risk to an insurer — a key consideration in the sell-side M&A process

Buyer’s Perspective

• Push for broad, unqualified representations
• Resist excessive materiality scraping (removing materiality qualifiers for purposes of calculating losses)
• Extend survival periods for higher-risk representations (tax, environmental, IP)
• Ensure fundamental reps survive indefinitely
• Set indemnification caps that provide meaningful protection

Reps and Warranties Insurance

Representation and warranty insurance (RWI) has become increasingly common. A buyer-side RWI policy allows the buyer to make claims against an insurer rather than the seller for breaches of reps and warranties. Benefits include:

• Sellers receive cleaner exits with less contingent liability
• Buyers gain a creditworthy counterparty for claims
• Facilitates transactions with multiple sellers (e.g., PE fund exits)
• Enables competitive bidding by offering sellers near-full indemnification relief

Reps and Warranties in Asia Pacific

Reps and warranties practice varies across Asia Pacific, as our M&A process guide details. In Australian transactions, warranty schedules tend to be extensive and heavily negotiated. In Japanese M&A, the concept of “representations and warranties” (表明保証) has been adopted from Anglo-Saxon practice but may be interpreted differently by local courts. Reps and warranties insurance penetration is growing rapidly in the region, particularly in Australia and Japan, but remains less common in Southeast Asian markets. AI-driven platforms like Amafi help advisors benchmark warranty packages across comparable transactions in the region.