Over the course of the past few years I’ve been working sporadically on a shortish (16,000 words) manuscript entitled “The Structure of M&A Contracts.” It discusses the function of the different categories of provisions in an M&A contract (representations, pre-closing obligations, conditions, indemnification, and termination provisions), the interplay between those categories of provisions, and the structural issues that routinely arise in negotiating them.
I apply to this topic the same approach I bring to bear in MSCD. The manuscript provides specific guidance regarding what contract language you should use to accomplish a given aim and what contract language you should avoid. Also, it presents some of its analysis in the form of tables, with the aim of making that analysis clearer. And it doesn’t hesitate to depart from the conventional wisdom.
In working on the manuscript, I’ve enjoyed the contrast with MSCD: Clear contract language is, as a general matter, a function of the cumulative effect of countless separate decisions, most of them of modest significance when considered in isolation. By contrast, the structure of M&A contracts is more of a puzzle, with small changes having dramatic consequences.
I’m currently discussing with West Legalworks the notion of doing a series of webinars on this topic or publishing the manuscript as a booklet, or both. And I’m contemplating devoting more of my energies to doing in-house M&A seminars. With that in mind, I thought I’d run by you one of the more interesting topics—as of what date, or dates, should the seller make its representations?
Any set of representations is preceded by an introductory phrase, or “lead-in.” Here’s the lead-in I recommend:
The Seller represents to the Buyer as follows, as of the date of this agreement and as of the Closing:
The wording of the lead-in raises a number of different issues, but what’s relevant for this post is that the recommended representations lead-in states that the seller is making the representations as of the date of the agreement and as of the closing. Review of contracts filed on the Securities and Exchange Commission’s EDGAR system indicates that although some drafters opt for that approach, others prefer not to state when the representations are being made and so use a lead-in such as this one:
The Seller represents to the Buyer as follows:
The latter approach results in the representations being made as of the date of the agreement but not as of the closing—the buyer wouldn’t be able to bring a claim for indemnification based on inaccuracy of the representations as of the closing, because no representations had been made as of the closing. Through the bringdown condition, the buyer might be able to use inaccuracy of any representation as a reason not to close, but that wouldn’t allow the buyer to recover damages.
Consistent with this, Kling & Nugent’s Negotiated Acquisitions of Companies, Subsidiaries and Divisions, at § 14.02, states that “If a representation is not true at closing (but was true at signing), the representing party cannot be sued for it; the other party can merely refuse to close.” But it goes on to say that “This can be resolved in the buyer’s favor if the indemnification provisions are properly drafted or if the representations (either each one or a general representation) provide that the situation as represented is true at signing and ‘at Closing, will be true.'”
But it would be awkward to address this issue through the indemnification provisions, given that it’s standard for indemnification provisions simply to refer to indemnification for inaccurate representations without addressing when those representations were made.
As for including the time of closing as a reference point in a representation, that wouldn’t result in the representation’s being made as of the closing but it presumably would provide the buyer a basis for claiming damages for inaccuracy as of the closing. But if you instead use the version I recommend as your representations lead-in, you would draft more concisely, as you wouldn’t need to include the closing as a reference point in each representation. It would also reduce the awkwardness of having the seller represent at signing as to circumstances at closing.
It’s standard for acquisition agreements to provide for the seller to deliver at closing an officer’s certificate regarding satisfaction of the conditions to the buyer’s obligation to consummate the transaction. Any given officer’s certificate might simply refer to the conditions in question by section number, or it might track their wording. But having the seller deliver an officer’s certificate at closing isn’t equivalent to having the seller make its representations as of the closing. If the officer’s certificate were incorrect, in that a representation that had been accurate as of the date of the agreement was inaccurate at closing, it’s not clear that the officer’s certificate would entitle the buyer to bring a claim for indemnification that it would not otherwise be entitled to bring under the agreement, as opposed to bringing, say, a claim for fraud.
This is something that Jim Freund discusses in § 5.3.2 of Anatomy of a Merger. He notes that if a representation is made only as of the date of the agreement and circumstances have changed by the time the closing occurs, then “although the purchaser might well have a rescission remedy and other rights under Rule 10b-5 (as well as personal claims against the fraudulent officer and the negligent attorney), the purchaser’s right to indemnification under the agreement is questionable—since the representation was true when made, and the lawyer’s opinion, the officer’s certificate, and the reiteration of representations are all merely closing conditions serving a different purpose in the overall scheme of things.”
The Model Asset Purchase Agreement, published by the American Bar Association’s Section of Business Law, attempts to circumvent this problem. It includes representations lead-ins that are silent as to when the representations are being made, which means that the representations are being made only as of the date of the agreement. So it provides for indemnification in the event of inaccuracy of any representation contained in a certificate delivered by the seller and the shareholders to the effect that their representations are sufficiently accurate to satisfy the bringdown condition. But besides being unorthodox, this arrangement seems contrived—it’s not clear that a certificate to the effect that a condition has been satisfied itself constitutes a representation.
Again, the simpler and clearer alternative would be for the representations lead-ins to state that the representations are being made as of the date of the agreement and as of the closing.
One shortcoming of my recommended form of lead-in is that it’s a little awkward to refer to the seller’s making now representations that it will in fact be making in the future, namely representations as of the closing. It would be more accurate to phrase my recommended version as follows: The Seller represents to the Buyer as of the date of this agreement, and will be deemed to have represented to the Buyer as of the Closing, as follows. But given the added complexity, in practical terms this alternative formulation doesn’t represent an improvement.
So that’s a taste of my analysis of the structure of M&A contracts. I’d be interested to hear what you think. And should I continue working to turn my manuscript into a booklet and a series of webinars?
6 thoughts on “The Structure of M&A Contracts—When Are Representations Made?”
I was bathed in the blood of the ABA’s model agreement, so it has long made sense to me to use the combined approach of ‘timeless’ warranties with specific indemnities. In fact, I wonder what the termination rights and indemnity would look like if not qualified by time. Would Buyer then be able to terminate or make an indemnity claim for a warranty that was true at signing and closing but not at some point in between?
Following on that covenant issue, it is also possible to simply have the warranties made as of signing with a “bringdown” certificate, as you describe. But, more importantly, you put in covenants that obligate the company to maintain the status that allows the various warranties to be true. So for each warranty you have a corresponding covenant that obligates the company to maintain that status until closing and to give buyer notice in change of status, etc. Then the termination rights and indemnity can be exercised for a warranty if it was a pre-signing issue or for breach of covenant if it happened in the interim.
The suggested lead-in says, in effect: “The Seller HEREBY represents to the Buyer” that the listed facts are true at signing and “WILL ALSO BE TRUE as of the Closing.”
A representation speaks as of the time that it is made. The Seller can, therefore, represent the accuracy of a present or historical fact at the time the agreement is signed. But could the Seller make a representation at signing as to a future circumstance at closing? Does the wording cause the Seller to make the same representation at closing – even without an contemporaneous bring down?
It seems that such a lead-in might be interpreted as: (1) a covenant that the Seller will at the time of closing represent that the circumstances that were true at signing continue to be true (i.e., a bring down commitment); (2) a warranty that the circumstances will be true at the closing; or (3) a covenant that the Seller will cause the circumstances to be true at the closing.
I think that Jim’s option (2) is the most likely interpretation – especially if you were to say:
“The Seller warrants to the Buyer as follows, as of the date of this agreement and as of the Closing:”
“Warrants” may be more accurate in this case in any event. If a representation is best described as a statement made by one party that induces the other party to enter the contract, then I always thought it odd to call them “representations” when actually included in the contract itself. Admittedly this is being quite pedantic, as the usage in contracts is so common – I mainly suggested “warrants” here because it more naturally covers a future fact.
Jim: In my post I say it would be more accurate to phrase my recommended version like this: The Seller represents to the Buyer as of the date of this agreement, and will be deemed to have represented to the Buyer as of the Closing, as follows. In other words, the seller would be making the representations at signing and at closing.
But I agree with you that it’s more likely that the disinterested reader would conclude that the seller is saying at signing that the representations are true at signing and will be true at closing.
The question is whether it matters which meaning applies. Either way, the seller is representing—whether at signing or at closing—as to accuracy of the representations at closing. I don’t see any reason why a court would hold that inaccuracy in any such representation would be inadequate to support a claim for indemnification or any other remedy that would otherwise be available.
Art: I’m comfortable with represents, for reasons I explain at length in MSCD starting at 12.285.
Here’s a thought to supplement my post:
Perhaps the most rigorous way to have the seller make representations at closing would be (1) to specify that it’s a condition to closing that the seller make the representations again at closing and (2) to have the seller, in the officer’s certificate, make the representations again at closing.
But that’s not the current practice. Given that the corporate bar has a limited appetite for novelty, I thought it best to offer a solution that requires one simple fix rather than the more invasive surgery required by the ideal fix. Bear in mind also that my simple fix is already in use in a substantial proportion of M&A contracts.
And here’s another reason why I’m not comfortable using an officer’s certificate as a basis for seeking indemnification due to inaccuracy in the seller’s representations at closing: An officer’s certificate will simply state that the bringdown condition has been satisfied or will track its wording. But the bringdown condition often applies a different materiality standard than do the representations themselves. If that’s the case in a given contract, then even if a court were to consider that the seller is in the officer’s certificate making representations as of the closing, those closing representations would, as regards materiality standards, be different from those made at signing.
I the officer's certificate is drafted properly, it won't just say that the condition has been met but rather it will recite that the reps and warranties are true and correct as of the closing. Of course, if there has been a change, it will have an exception and that will possibly give the buyer an out. It is standard for the indemnification clause to cover not only the reps and warranties in the contract but those made in the officer's certificate. So I don't see much of an issue with any of this. A more interesting concern for sellers, however, is agreeing to the more comprehensive lead in language (reps and warranties are made as of signing and closing) if it's possible that the permitted conduct of the business would allow for a change in the "snapshot" of the company depicted in the reps and warranties. From the seller's perspective, you wouldn't want to be in a position where the permitted conduct of the business results in a change that prevents a bring down of the reps and warranties, under circumstances where the contract nonetheless mandates a clean bring down. So this needs to be taken into account in both the reps and warranties and the wording of the closing conditions.