This Statement of Fact Is in Every M&A Contract, But You Won’t Have a Remedy If It’s Inaccurate

I recently received the following from a reader (I redacted information identifying a law firm):

I practiced at big firms for a few years, but after being an in-house counsel at small companies for a decade or so, and being in business, I’ve started my own practice focusing on startups and small companies. I appreciate MCSD and your blog.

I don’t do a lot of M&A work these days, but I recently had occasion to handle a small ($2MM) stock acquisition for a client. I thought it would be quick and easy. Lo and behold, the Seller hired __________’s __________ office. Well, you can imagine how smoothly that went.

It brought me back to my couple of years at a big corporate firm (I did not stick around there long), learning how to do M&A deals. It struck me even then that several of the typical reps were unnecessary and pointless.

Take the standard “fundamental representation” regarding the authority of the sellers: “Sellers have all necessary power and authority to enter into this agreement, to carry out their obligations hereunder and to consummate the transactions contemplated hereunder. This agreement has been duly executed and delivered by Sellers, and this agreement constitutes a legal, valid and binding obligation of Sellers enforceable against Sellers in accordance with its terms.”

How does this representation ever help a buyer? If the Sellers did not have all of the necessary power and authority to enter into the agreement, or the agreement were not duly executed by the Sellers or not a valid and binding obligation, then how would the representations contained in such an agreement be valid and enforceable? Those reps can never be breached, because if they are not true, then they are by definition not valid. What am I missing here? (I can see how the “consummate” part might be of some help, because maybe a Seller could have authority to execute an agreement but not, in some respect, to consummate part of the deal.)

I searched caselaw, and I have yet to find a case where these provisions have been litigated. Perhaps both because they are pointless, and also, in how many M&A deals is it going to be the case that the signing entity wasn’t really an entity with authority? If the seller is an entity, it would be customary for a Board authorizing resolution to be a closing delivery, which pretty much settles the issue.

As with many of the issues you discuss, there may be no specific harm to this rep. and it’s certainly one that’s not heavily negotiated, but if I am correct, it’s just more unnecessary verbiage. What would I be losing to just drop this rep from my standard agreement?

I agree with this reader. If a statement of fact pertains to something necessary to make the contract an enforceable contract and that statement of fact is inaccurate, it follows that you don’t have a contract. It also follows that you can’t sue whoever made that inaccurate statement, as it’s contained in a contract that isn’t enforceable. So you might as well omit any such statements of fact.

That’s why MSCD 5.20 says “If you’re concerned whether the person signing for the other party is authorized, having that person tell you that they’re authorized shouldn’t provide any reassurance. Instead, get evidence that’s more reliable, for example a board resolution.”

I looked around for discussion of the relevance or irrelevance of this statement of fact, but all I found was an assertion that “some borrowers argue, unsuccessfully, that it should only be in the opinion from their legal counsel.” The reference to opinions makes sense: if a statement of fact regarding enforceability of a contract is made somewhere other than that contract, then it would survive that contract’s being held unenforceable.

With opinions on my mind, I contacted Steven O. Weise, a partner at Proskauer. Among Steve’s many accomplishments, he’s co-author of Glazer & Fitzgibbon on Legal Opinions. Here’s what he said:

I generally agree. The one thing that it gets (if it turns out that there was no authority) is possibly a rep by the agent (the person signing) in his or her personal capacity that he or she has power to bind the organization. So maybe there’s a claim against the agent, which would create an incentive for the agent to testify that he or she in fact was authorized (if true).

Of course, that’s the sort of argument you make after a dispute has materialized; it would be better to get comfort on authorization before the contract is signed. Furthermore, this rationale has no bearing on the parts of the statement of fact that relate to matters other than authorization of the person signing.

Even though this statement of fact is pointless, I expect that it isn’t going anywhere. That’s because the conversation  required to eliminate it would likely make any buyer uncomfortable: “What, you’re not willing to say that the contract is enforceable!” Since this statement of fact is toothless, why risk rocking the boat by seeking to eliminate it?

(By the way, note my terminology: I refer to “statements of fact,” not “representations,” because the latter term is inextricably linked to a particular cause of action, namely a claim for misrepresentation. And statements of fact aren’t breached, they’re accurate or inaccurate.)

Bonus: I first met Steve Weise in connection with a panel discussion that the ABA recorded in a studio in 2005; we were both on the panel. Here are three clips from that event: clip 1, clip 2, clip 3. It seems like a looooong time ago.

Posted in M&A | 6 Comments

  • Mark Anderson

    There’s a mountain of this stuff in some corporate and financial contracts. It’s creeping into templates for general commercial contracts. As well as the points made in your article, I also query how often ultra vires is a legitimate excuse for non-performance. Very rarely indeed under English law; is it any more common in the US?

  • Mike Cremata

    What about where one party is signing on behalf of another party, such as an affiliate or subsidiary? That’s the only situation where I use a SOF like the above. I’ve often wondered, though, what would be my client’s remedy if the signing party didn’t have the authority they claimed? I generally try to couple this SOF with a specific obligation of the signing party to be jointly liable for the obligations of the other party, but I’m not sure how much that helps in this situation because, if the other party isn’t bound under the agreement, then they don’t technically have any obligations. So what do you in a situation like this? Do you have to insist on the other party’s signature? Or could you recover the “would-be” third party’s obligations from the signing party merely based on its breach of the SOF regarding authority? Do you know of any cases where this issue has been litigated?

    • Mike Cremata

      I suppose one option to consider would be a provision along the lines…

      “If [signing party] does not have authority to bind [third party] under this agreement, then [signing party] shall be responsible for [third party's] use of the [Service/Products/etc.] and all obligations [third party] would incur if [third party] were a party to the agreement.”

      I’m sure that could be crafted more artfully, but hopefully you get my drift. It’s certainly not the most elegant way to handle this issue, but would it work? Or is it implied by the SOF re: authority?

  • LAB

    Not sure I understand why we keep referring to this as a statement of fact. The fact is (no pun) that this statement is one of law. Whether or not someone does or does not have authority or whether an agreement is enforceable is a legal conclusion.

    • http://www.adamsdrafting.com/ Ken Adams

      This isn’t analogous to the “question of law” and “question of fact” distinction offered by litigators, whatever that’s worth. Instead, we’re dealing with facts, whether with regard legal status or anything else. Acme has [or doesn't have] power to enter into a contract? Well, that’s a fact, just like a statement regarding the condition of Acme’s inventory is a fact. In the same way, the universal but nonetheless confusing term of art representation is applied to all such statements of fact.

  • practitioner

    If the “statement of fact” was not true, the buyer would have a claim for damages against the seller. Believe it or not, a lot of dollars are spent acquiring a company – investment bankers and lawyers are not cheap. A buyer would certainly suffer damages and have plenty of causes of action to bring against a seller who breaches their warranty. I would even go so far as to say that such a seller would be committing fraud. You academics need to actually practice before you preach.