Share Purchase Template (Part 4): Representations and Warranties

Share Purchase Contract Please note that the information provided herein is not legal advice and is provided for informational and educational purposes only. If you need legal advice with respect to buying shares of a private corporation in Ontario, you should seek professional assistance. Representations and Warranties Representations and warranties are promises or statements which a party makes and which the other party is relying upon in order to move forward on this deal in the Share Purchase Agreement. A "representation" is a statement of the past or present facts that are represented by a party as being true. "Warranties" are promises that existing or future facts are or will be true. The distinction between representations and warranties is no longer relevant. The Vendor's Representations The idea behind the Vendor's representations is simple: the Purchase wants the Vendor to make statements concerning the corporation and the shares because that's what it's buying (in whole or in part). If the representations of the Vendor do not turn out to be true, complete, or fair, then the Purchaser may be able to get out of the Share Purchase Agreement and get its deposit back (if it gave one). Indeed, the Vendor may even have to indemnify (i.e. pay) the Purchaser if the representations don't turn out to be true. So the Vendor's representations allow certain risk to be put on the Vendor; the Purchaser wants to make sure it's getting what it bargained for. So what kinds of representations could the Vendor make? Well, here's a non-exhaustive list: The corporation is valid and in good standing with relevant government bodies. The corporation is a private, non-reporting company (e.g. it has less than 50 shareholders, does not distribute its shares to the public, etc.) The corporation carries on the business of [x] in the following locations: … The corporation has complied with extra-provincial and other applicable licensing registration or qualification requirements; The corporation's constating documents (such as articles of incorporation) are unchanged since a specified date, and accurate copies provided and permit the company to carry on its present business and own its present assets; The corporation has [x] number of class [x] type of authorized, issued and outstanding shares; The corporation' [x] class of shares have the following rights: …; The corporation's issued shares are fully paid and non-assessable; The company has no other issued, or agreements to issue, securities, options, rights, etc.; The Vendor owns the following number and type of shares: …; The directors and officers of the company are [x]; The Vendor has good and marketable title to the shares; The sale purchase has been authorized by all necessary corporate action; There are no other contractual or regulatory consents, licenses, permits or approvals required, except as set out in the agreement; There is or is not a shareholders' agreement; There are no restrictions on share transfers or such restrictions have otherwise been dealt with; No court orders preventing the transaction from occurring; The Audited Financial Statements and the Closing Date Financial Statements have been prepared according to GAAP and are true, complete, and fair; There haven't been any material adverse changes in the corporation's Business, assets, financial condition, earnings, etc.; There aren't any known or pending litigation claims against the corporation, including but not limited to administrative matters or investigations by any governmental authority; and Representations concerning inventories, accounts receivables, insurance, books and records, bank accounts and powers of attorney, customers and suppliers, material contracts, real or leased property, labour matters, intellectual property matters, environmental concerns and and tax matters. PHEW! There are a whole slew of representations which the Vendor could make to help satisfy the Purchaser that it the deal is legitimate. The Purchaser's Representations Ok, so what kinds of things will the Purchaser be representing? Well, basically, the Vendor wants to make sure that the Purchaser is ALLOWED to purchase the shares (e.g. it has all necessary consents, approvals, etc. and there's nothing preventing it from doing so) and that it HAS THE money to make it happen. Here's a non-exhaustive list of the types of things that the Purchaser would represent to the Vendor: If the Purchaser is a corporation, then it has all the necessary corporate power to make the deal happen; The Purchaser would not, by going through with the Share Purchase, end up violating any law, order, resolution of its own board, contract which it has with another party, etc.; The Purchaser has assets worth [x], gross revenues in the amount of [x] and net income in the amount of [x] as of a certain date; and The Purchaser is not a non-Canadian within the meaning of the Investment Canada Act. The bottom line to keep in mind is that there are lots of different kinds of representations and warranties – dealing with the Vendor, the Corporation and its business, the Shares, and the Share Purchase Agreement – which the Purchaser will need some comfort with. Limiting Representations and Warranties There are a few ways for a party to claim that it never breached a representation or warranty and it all has to deal with defining limitations. First, a party can try to carve out certain exceptions to a representation or warranty. Second, a party can shift liability for a representation or warranty on the other side by saying that the other party had the opportunity to be diligent and didn't find anything wrong at the time. Third, a representation or warranty can be limited to the actual and specific knowledge of a party at a particular time. Finally, a representation or warranty can be limited by "materiality" (i.e. importance, as determined in the sole and absolute discretion of party [x]); a material contract may be defined as any agreement that has a value of over $10,000 within the past 2 years. Again, all of these things will be negotiated in the actual deal. Survival of a Representation or Warranty A party's liability for breach of a representation or warranty must be defined so that the party is not on the hook forever. The Vendor (who is giving the majority of representations and warranties because it so happens to have that information in its power, possession and control) will still want to know with certainty when its liabilities will end. A Purchaser may require a Vendor to require the representations and warranties it gives to continue (i.e. survive) to be valid, true and complete for 1 to 2 years AFTER the Closing. If, at any time during this period, the Purchaser discovers a breach of a representation or warranty, then they can claim a breach by providing notice to the Vendor. If the time period after closing expires, then the Purchase may be prohibited from doing so (contractually, they only agreed to a set time period to go after the Vendor). Now, some representations and warranties may not even survive the Closing; this all gets negotiated in the process. It's also a good idea to keep in mind that the Limitations Act of Ontario sets out certain maximum periods during which a claim may be brought against a party. Related posts: Share Purchase Agreement (Part 4): Representations and Warranties… Share Purchase Template (Part 1): Introduction Share Purchase Template (Part 2): Introductory Clause Share Purchase Template (Part 3): Background + Purchase Price Share Purchase Agreement (Part 3): Sample | Template | Form

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