Representations and warranties (reps and warranties, or R&W) are contractual statements made by the seller in a Share Purchase Agreement (SPA) attesting to the accuracy of specific facts about the target company as of the signing date. They are the primary legal protection mechanism for the acquirer against undisclosed risks and liabilities discovered after closing — creating a contractual right to indemnification if a representation proves inaccurate or a warranty is breached.

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Typical representations and warranties cover: financial statements (accuracy and compliance with applicable standards), tax compliance, material contracts and absence of default, intellectual property ownership and freedom to operate, employment matters (no undisclosed labour disputes), litigation (no pending or threatened proceedings above a threshold), environmental compliance, and absence of material adverse change since the accounts date.

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The SPA typically includes: a basket (minimum aggregate claim threshold, typically 0.5–1.0% of EV), a cap (maximum total seller liability, typically 20–30% of EV for general reps), a survival period (12–24 months for general reps, 6–7 years for tax and fundamental reps), and a disclosure letter (seller's specific disclosures against the representations). W&I insurance is increasingly used to shift R&W exposure from the seller to an insurer.

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Example: 18 months after closing a Franco-Swiss acquisition, the acquirer discovers a CHF 420,000 tax liability for undeclared social charges — not disclosed in the data room. The tax representation in the SPA explicitly covers this category. The seller is notified of a claim; after negotiation, a settlement of CHF 350,000 is agreed — within the coverage period and above the CHF 100,000 basket.

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At Hectelion, our financial due diligence mandates are specifically designed to validate the accuracy of representations and warranties, identifying potential claim exposures before closing.