Monday, 23 January 2017

TRUST'S Greetings & SPA Series Part 12: Buyer's Reps & Warranties

Sunny January & 2017 for everyone, 

Once again a magnificient year has passed and I must say as we had such an energetic ending for 2016, I thought that I should start this year's postings with a small recap of what happened.

First of all, at AIPPI Milan, we presented our national group's report on security interests over intellectual property (which is also going to be published as an article later this spring). Further, we provided advice in many interesting transactions, such as, Affecto in their acquisition of the big data analytics company Bigdatapump (press release here). For those of you who do not know them already, Affecto is a listed Finnish company that creates business value for our customers by combining information with insight, leveraging the full data set surrounding organizations, and proving services ranging from information technologies to advanced digital business solutions. Those of you who know me personally can definitely believe that it was just that kind of tech M&A deal I love to do with a focus on technology, intellectual assets and big data. In this area TRUST. truly has unique industry expertise and rock-solid track-record from earlier tech deals, from outsourcings to cyber-sector and what I like to say "the best M&A team in Finland" – and I truly mean that! We also continued our transactional work in the wellness and sports sector, advising the tech company Healfactory / TNT trainers, for example, in the ownership arrangements and financing round, e-commerce and data protection matters – a deal that continues our flow of transactions in this sector after the SportsTracker acquisition by Suunto and Amer Sports. Of course there were several others (see more from here) so lots of interesting assignments completed and much more is still to come in 2017.

Personally I celebrated my fourth year at the TRUST. and at the same time I also wish to thank you all for the greetings I received via LinkedIn and otherwise. To start this fourth year with style, we also moved to the new premises in the distinguished Fennia building. At the company level, things are moving forward with an ever-increasing pace and focus on recruitments during this 2017 – we try to arrange house-warming parties but first we have to wait to get all the things in right places (and get furniture such as chairs which are, unfortunately, still missing)!

Before we go to our actual topic, one final issue and benefit for the readers of this blog; if you are interested in ICT and outsourcings, I hope you could attend to Tivia's seminar this spring (Time 6.4.2016 (klo 8.00–12.00) | Place Technopolis Otaniemi, Espoo), which contains magnificent program with several top-notch speakers like VP Markus Kinni from Liaison, Kai Erlund from Dittmar & Indrenius, Riitta Lehikoinen from Winway and Juho Ranta from 2nd Nature Security. Hope to see you there and I have one free participation available so please let me know if you wish to take this opportunity! 

Our real topic for today relates to the buyer's representations and warranties. Here we look at the question from both the seller's and the buyer's representations and approaches in mind that could be taken in the documentation and argumentation used during the negotiations. We have already earlier covered the reasoning and ideas behind representation and warranties in general and their connection to disclosures (see more from earlier posting from here) so we go directly to the topic.

Purchaser's approach

First of all, the buyer represents and warrants to the sellers that the representations and warranties set out in this section X.X are true, accurate, and not misleading on the completion date (except those of the representations and warranties that address matters only as of a particular date or only with respect to a specific period of time, which need only be true, accurate, and not misleading as of such date or with respect to such date or period). What are the "bare minimum" warranties that the buyer should be able to give? 

At least the following should be included: 

"Organisation and Existence of the Buyer"

Meaning that the buyer is, say, a legal entity duly organised and validly existing under the laws of Finland. Naturally, one has too take into account whether the buyer is a private company or an entity.

"Power and Authorisation of Buyer"

Under this representation, the purchaser represents that it has the full legal and corporate power (reference including any necessary decisions, permits, approvals, consents and authorizations) to enter into the agreement and to consummate the contemplated transaction.

"Enforceable Agreement"

This rep states that the agreement constitutes a valid and binding obligation of the purchaser enforceable against it in accordance with its terms. There might be additions that the execution of the agreement, the consummation of the transaction will not result in a breach of any judgment or order of any court, governmental or other body, any applicable law or regulation, any agreement or commitment binding on the purchaser, or the articles of association of the buyer.

Seller's approach

Those were the standard ones the purchaser should be able to give, but there are typically additional requirements coming from the seller and these include the following:

"The Purchaser is not insolvent"

Under this one, the purchaser represents that no decision has been taken, or request made, or other initiatives taken, by the purchaser for the purchaser’s bankruptcy, winding up or liquidation. It might continue that "to the buyer’s knowledge, no decision has been taken, or request made, or other initiatives taken by any court or other authority, or any third party for the purchaser’s bankruptcy, winding up or liquidation". Very handy in distressed situations, but otherwise not perhaps the most important element of the deal.

"Absence of Litigation and Claims"

This pretty much states the issue mentioned in the heading that there are "no claim, action, proceeding or investigation is pending or threatened against the purchaser which would delay or prevent the consummation of the transactions contemplated by this agreement". 

One issue from the seller's side which relates to this theme is a representation and warranty in which the buyer gives a representation and warranty that it is not aware of any breach of any covenant or any of the representations and warranties of the seller or any other provision of the agreement which gives comfort that there is not going to be a claim immediately after the closing for example. On the other hand, if the buyer is aware of the breach prior to the closing, under the contract law principle one cannot raise a claim anyway as you were aware of the issue at the time of purchase. However, in order to avoid liability, the sellers should be able to prove that the breach was disclosed sufficiently so you see the reason for having this kind of representation in place?

"Sufficiency of Financing"

The higher the purchase price or the more complex the transaction finance is, the more relevant this next rep is so here it is stated that "the buyer has arranged for binding and sufficient financing for the consummation of the transactions contemplated by this agreement, including but not limited to the payment of the purchase price and any transfer taxes in full, and such financing is not subject to or conditional upon any conditions or circumstances beyond the control of the buyer". In smaller deals this can typically be ignored if the parties are in good financial standing.

"Authority Approvals"

Finally, this states that "no approval, authorization, clearance, consent or permit of a competent national or supranational authority, including any relevant competition authority, is required for the lawful and valid consummation of the transactions contemplated by this agreement by the purchaser". Typically this refers to merger control, but there are also other cases where this is relevant. For example, I was involved in a transaction in which the target was a Finnish radio station and there it was an issue regarding the approval to transfer the radio licence to the purchaser, which is why this representation was also relevant.

Hopefully you find this helpful. Next, we will look at the seller's representations and warranties! I think that we might go in more detail to those but we'll see – now, a splendid start for your week.

Best wishes,