Representations & Warranties (R&W) are contractual statements of fact and guarantees regarding the state of affairs of the company to be acquired. They form the heartbeat of international M&A transactions. In our practice, we advise Dutch clients on the purchase and sale of companies, often across borders. The difference between a strong and a weak R&W set accounts for millions of euros. Striking the right balance between buyer protection and seller peace of mind is a skill.
What is the legal problem?
A representation is a statement of fact at a specific moment. A warranty is a promise regarding the accuracy of that statement. Under common law, legal consequences differ: misrepresentation leads to rescission and damages; breach of warranty only to damages. Under Dutch law, this distinction is less pronounced. Internationally used model contracts often combine both concepts.
What does the law say?
Under Dutch law, Articles 6:228 BW (error) and 6:74 BW (breach of contract) apply to incorrect representations. In HR 23 May 2014, NJ 2015/12 (Eurogenetics) and HR 4 February 2000, NJ 2000/562 (Mol/Meijer), the Supreme Court refined the interpretation and consequences of R&W in an M&A context. Under English law, the Misrepresentation Act 1967 and case law regulate what applies in the case of incorrect representations.
M&A practice uses R&W regardless of applicable law, often with a disclosure letter and indemnity. ICC and IBA model contracts offer detailed R&W structures for international transactions. For Warranty & Indemnity Insurance, the specific policy conditions of AIG, Liberty, and other R&I insurers apply.
What risks do companies face?
Overly broad R&W makes the seller liable for matters beyond their control. Insufficient disclosure leads to unexpected claims. The absence of a ceiling or survival period leaves parties in uncertainty for years. Under English law, damages for breach of warranty can be very high. International remedies vary, which can lead to unexpected outcomes in arbitration if R&W is not carefully defined.
Practical example from our practice
We advised a Dutch family business on the sale of shares to a British buyer. The original draft contract contained broad R&W without caps for six years of survival. During renegotiation, we built in: caps of 25 percent of the purchase price for general R&W, 100 percent for fundamental (title, authority), a two-year survival rate for general R&W, a seven-year rate for fiscal R&W, an extensive disclosure letter, and W&I insurance with Liberty for residual risk. The seller slept better, the buyer had protection, and the transaction went through.
What can you do?
Work with a clear set of R&W, tailored to the transaction type. Build in caps (ceilings), baskets (thresholds), and de minimis. Apply survival periods per type of R&W. Create a disclosure letter to exclude known facts. Combine with indemnities for specific risks and escrow for security. Consider W&I insurance for residual risk. See also our article on International Mergers and Acquisitions: Legal Considerations.