468 16 Key Provisions of the Acquisition Agreement
sold) and special areas (such as tax liability, environmental liability) may survive
past the general survival period.^17
Vendor’s representations. As explained above, representations and warranties
are often used interchangeably (which can increase legal risk for the parties) or
jointly (in order to mitigate the acquirer’s legal risks). For this reason, they often
address similar questions.
If representations and warranties are used separately, the vendor’s representa-
tions are often fact statements about the vendor. Representations typically address
counterparty corporate risk (for the distinction between counterparty corporate
risk and counterparty commercial risk, see Volume II). Representations are usu-
ally more or less similar regardless of the transaction.
Representations contain terms which state that the contract is binding and en-
forceable. In particular, a party represents: that it has power to conclude binding
contracts in general (capacity); that its representatives have power to conclude
binding contracts on its behalf (power and authority); and that the contract is bind-
ing.
In order for the contract to be binding and enforceable, a number of legal condi-
tions relating to the party must have been fulfilled: the party must be incorporated
as a legal person and validly existing; the party must have taken care of all internal
corporate action to authorise the transaction and to execute it; all necessary regula-
tory approvals must have been obtained; and there must not be any circumstances
that threaten the existence of the party as a legal person or the enforceability of
contracts concluded by it.
Vendor’s warranties. If the representations of the vendor are used as fact state-
ments about the vendor itself, warranties can be used as fact statements about the
object. Compared with representations, their contents are more transaction-
specific. Warranties typically regulate the specifications of the object, the agreed
profitability of the object, and counterparty commercial risk.
In a share sale, warranties paint a picture of the target company, the shares that
are being bought and sold, and the target company’s business.
Vendor’s warranties reflect the balance of bargaining power between the par-
ties. In auctions, the increased negotiating leverage of the vendor means that bid-
ders may be offered just a few broader warranties on the financial statements as a
whole and perhaps specific detailed warranties limited to areas of concern identi-
fied in due diligence. Another approach is for the acquirer to request detailed war-
ranties but accept qualification by information “fairly” disclosed in the data room
(see below).^18
Vendor’s covenants. The vendor may undertake covenants. Restrictive cove-
nants include both non-competition and non-solication clauses.
A non-competition clause typically attempts to prevent the vendor from com-
peting with the acquirer within a certain product market and geographic area for a
(^17) Ibid, pp 219–221.
(^18) Schmidt KM, Private Equity: Current M&A Issues for Buyers. In: PLI, Eighth Annual
Private Equity Forum, Corporate Law and Practice Course Handbook Series (2007)
p 128.