Representations and Warranties

Also known as: Reps and Warranties, Warranties, Representations, W&I, Beyan ve Tekeffüller

In short

Assurances given by the seller or company in an investment or share purchase agreement about the company's legal, financial and commercial position, giving rise to liability if untrue.

Representations and warranties are assurances by the seller or company that the assumptions on which the transaction is based are correct. Since the buyer or investor cannot see everything in due diligence, it leaves part of the risk relating to the company’s position with the seller through these assurances.

Types

Fundamental warranties: The shares belong to the seller free of encumbrances, the seller has capacity to enter into the agreement, the company was duly incorporated and its capital is paid up,
Business warranties: Accuracy of financial statements, material contracts, employees, taxes, intellectual property, personal data, litigation and regulatory compliance.

Disclosure Letter

The seller discloses matters that are exceptions to the warranties in a disclosure letter. A breach of warranty cannot be claimed for a disclosed matter. For the buyer, it is therefore important that disclosures are sufficiently specific and that the whole data room is not treated as disclosed through general wording.

Limits on Liability

De minimis: Claims below a set amount are disregarded,
Basket: No liability arises unless total claims exceed a set amount,
Cap: Total liability is limited to a percentage of the purchase price,
Claim periods: Shorter for business warranties, longer for fundamental and tax warranties.

Position under Turkish Law

Under Turkish law, the Turkish Code of Obligations’ rules on the seller’s liability for defects may apply to a share sale. However, these rules relate mainly to the shares themselves; their application to problems with the company’s assets is debated. They also provide short notice and limitation periods. The parties therefore set up representations and warranties as a separate guarantee undertaking, and state clearly in the agreement the scope and periods of liability and whether the defect rules apply. A separate indemnity is provided for specific risks. In large transactions, part of the risk may be transferred to warranty and indemnity (W&I) insurance.

Frequently Asked Questions

Are representations and warranties the same as an indemnity?

No. A representation and warranty is a general assurance about the company's position; if breached, the buyer must prove its loss and the contractual limits apply. An indemnity is a specific undertaking to cover loss if a particular, often known, risk materialises.

Is the seller liable without limit for every breach of warranty?

Usually not. Agreements provide a de minimis threshold for small claims, a cap on total liability and claim periods. Higher caps and longer periods are accepted for fundamental warranties such as title to shares and the seller's capacity.

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