Representations and warranties

Representations and warranties (R&W) are the seller's contractual statements in an M&A SPA affirming the accuracy of specific facts about the target company as of the signing date: financial statements, tax compliance, material contracts and absence of default, intellectual property ownership, employment matters, litigation, environmental compliance and absence of material adverse change since the accounts date. They are the buyer's primary legal protection against undisclosed risks and liabilities discovered after closing: their breach creates a contractual right to indemnification. In France, R&W are codified as a specific warranty mechanism (garantie d'actif et de passif); in Switzerland, they operate under general contract law.

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The R&W framework is governed by: a basket (minimum aggregate claim threshold, typically 0.5–1.0% of enterprise value), a cap (maximum total seller liability, typically 20–30% of EV for general reps), survival periods (12–24 months for general reps, 6–7 years for tax and fundamental reps) and a disclosure letter containing the seller's specific disclosures against the representations. W&I insurance is increasingly used to transfer warranty exposure from the seller to an insurer, facilitating cleaner exits.

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Example: in a CHF 20.0 million Swiss acquisition, the R&W package includes: basket CHF 100,000 (0.5%), general cap 25% (CHF 5.0 million), tax warranty cap at 100% of price, 2-year general survival (5-year tax). A CHF 350,000 environmental liability emerges post-closing: the buyer's net recovery = CHF 350,000 - CHF 100,000 (basket) = CHF 250,000, within the cap and well documented in the warranty claim. In another Franco-Swiss case, a CHF 420,000 tax liability for undeclared social charges is discovered 18 months after closing and settled at CHF 350,000, within the coverage period and above the CHF 100,000 basket.

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At Hectelion, we advise on R&W scope, basket, cap and survival calibration in every M&A transaction, and our financial due diligence mandates validate the accuracy of representations and warranties before closing.