Representations and Warranties
Statements of fact made by one party (typically the seller) to another (typically the buyer) in a transaction agreement, covering the condition of the target business. The central risk-allocation mechanism in any M&A transaction.
Representations and warranties are statements of fact made by one party (typically the seller) to another (typically the buyer) in a transaction agreement, covering the condition of the target business, its corporate organization, ownership of assets, financial statements, contracts, intellectual property, compliance with laws, litigation, employment, tax, and other material matters. A "representation" is technically a statement of present or past fact; a "warranty" is a promise that the fact is true. In Texas M&A practice the terms are used interchangeably.
Structure: general vs. fundamental
Most M&A agreements distinguish between general reps (financial statements, contracts, IP, compliance, litigation) and fundamental reps (organization, capitalization, authority, ownership of equity, no broker fees). Fundamental reps typically have longer survival periods (often until the applicable statute of limitations runs) and higher (or no) indemnification caps; general reps typically survive 12–24 months and are subject to standard indemnification caps.
Survival and limitation of liability
Most agreements expressly provide that reps and warranties survive closing for a specified period, typically 12 to 24 months for general reps, longer or perpetual for fundamental reps and specific tax reps. The survival period can operate as a contractual limitations period. In Texas, a contract may not shorten the time to sue to less than two years, and a shorter period is void (Tex. Civ. Prac. & Rem. Code § 16.070(a)). The bar does not apply to an agreement for the sale or purchase of a business entity if a party pays or receives consideration with an aggregate value of at least $500,000 (§ 16.070(b)).
Reliance and sandbagging
Whether a buyer must demonstrate reliance on a rep to recover for breach is contested under Texas law. See Sandbagging. Pro-sandbagging clauses (buyer-favorable) and anti-sandbagging clauses (seller-favorable) are used to displace the default rule.
Reps and warranties are the central risk-allocation mechanism in any M&A transaction. They identify what the buyer is paying for; they trigger indemnification when wrong; and they determine the parties' post-closing liability landscape. Disclosure schedules paired with the reps modify the reps with specific exceptions.
Companion article: Selling Your Business in Texas