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In the world of M&A, each party to a purchase agreement makes certain representations and warranties that serve to allocate risk between the parties and provide a basis for post-closing indemnification obligations. Although often used interchangeably, there are functional differences between a representation and a warranty. A representation is an assertion of past or existing fact given by one party to induce another party to enter into an agreement. A warranty is a promise that the assertion of existing fact or future facts are or will be true, along with an implied promise of indemnity if the assertion is false.

Representations and warranties are often heavily negotiated areas of an agreement. The number and nature of representations and warranties are specific to each party, the nature of the contract itself, and the subject matter of the contract or dealings.

A seller’s representations and warranties serve several related purposes. They serve as a disclosure about the seller and the seller’s business as of a specific date, give important information about the stock or assets being sold, provide a basis for the buyer’s right to terminate before or at closing, and affect the buyer’s right to indemnification by the seller and/or its principals. Representations and warranties could favor either a buyer or a seller depending on several factors including each party’s negotiating power, the nature of the transaction, and the trade in which the parties operate.

Standard representations relate to due organization, valid existence and good standing, power and authority to operate the business and to enter into the agreement, and compliance with laws. Other representations and warranties relate to the subject matter of the agreement, such as title to assets, liens and encumbrances, intellectual property rights, taxes, and litigation. Rather than omitting representations and warranties in their entirety (which will likely raise red flags to the other side), a seller should attempt to qualify its representations and warranties. This can be accomplished in a number of ways.

For instance, because it is not always possible to account for every single item that should be listed in an agreement, a seller may attempt to limit representations and warranties to apply only to things and matters that are “material” and to add “knowledge” standards to limit the statement of fact to things that the seller actually knows of or should have known of. Another option is to limit representations and warranties to apply only to certain time periods (e.g., “within the past three years”). Most importantly, a seller should disclose as many exceptions to facts or conditions that are inconsistent with the general statement of fact made in any corresponding representation or warranty. This reduces the potential for future claims of breach of representations and warranties based on non-disclosure of material conditions. A combination of the concepts above can be proposed by the seller as well. For example, “[e]xcept as set out on Schedule X.XX, there are no pending, and to seller’s knowledge, threatened lawsuits, actions or other proceedings or governmental investigations relating to the [s]eller’s properties or business” could be added to a representation and warranty involving litigation and other actions to avoid making an absolute statement of fact.

On the other hand, a buyer wants the seller’s representations and warranties to be unqualified and as broad as possible. Broader representations and warranties often requires a seller to disclose more information during contract negotiations and due diligence and can provide a greater foundation for buyer’s termination and indemnification rights in the event of a post-closing breach. Disclosure schedules are also utilized by the buyer as they can require a seller to list out certain important business items, such as required permits, third-party consents, and employee benefit and compensation information. By requiring the seller to list out these types of items, the buyer can utilize the disclosure schedules as a checklist of items to be tracked and completed leading up until closing. When signing and closing are not on the same day, a buyer will look to insert a “bring down” condition of the representations and warranties to ensure that the seller’s representations and warranties made as of the signing date are true and accurate as of closing date.
Representations and warranties can be as complex or as simple as agreed upon by the parties but, more often than not, they are the legal basis for the parties’ willingness to complete an M&A transaction.

Our legal team has a depth of experience in structuring M&A transactions on both the buy-side and sell-side across a variety of industries, including healthcare, technology, real estate, and retail. Learn more on our Mergers and Acquisitions page.

“Choice-of-law” provisions, identifying which state’s laws a contract will be interpreted under, are almost universally found in contract “boilerplate.” Businesspeople anxious to get deals done typically focus their attention on the up-front-and-center contractual provisions detailing the terms of the deal, not the boilerplate language concerning jurisdiction, venue, choice-of-law, and other unexciting provisions stuck in at the end, almost like an afterthought. But a recent decision from New York’s Court of Appeals, 2138747 Ontario, Inc. v. Samsung C & T Corporation,[1] reminds businesses and lawyers alike that every single term in a contract – no matter how unimportant it may seem during the drafting process – merits careful consideration before the parties sign.

In Ontario, the issue was the choice-of-law provision – in particular, whether a choice-of-law provision in a contract between non-New York litigants providing that the contract was to be “enforced” under New York law required straightforward application of New York’s six-year statute of limitations for breach of contract actions,[2] or instead whether the “borrowing statute”[3] should be applied.  The borrowing statute of CPLR 202 provides that New York non-residents may bring claims pertaining to causes of action that accrue outside New York only if the action would be timely under both New York and the home jurisdiction’s statute of limitations.

By way of background, most choice-of-law provisions direct a court to apply the substantive law of the chosen state (essentially, laws that concern a litigant’s rights). However, in Ontario, because the provision at issue provided that the contract would be “enforced” according to New York law, the litigants agreed that New York procedural law would also apply (essentially, the law that governs conduct in the courtroom). Rules regarding statutes of limitations – which set the time period within which a litigant may prosecute a claim – are generally considered by New York courts to be procedural.

Against this backdrop, the issue in Ontario was this: since the contract specified that New York procedural law would apply, how should the court reconcile two conflicting procedural rules? Should it enforce the six-year statute of limitations as it would if the breach concerned New York parties? Or should it find a lawsuit timely only if it was timely under both New York and the home jurisdiction’s statute of limitations (pursuant to the borrowing statute)?

Ultimately, the Ontario court ruled that the borrowing statute applies, requiring the claim to be timely in both venues, in part because it was in direct contrast to the long-standing common law rule that the procedural law of the venue controls. In other words, if the legislature upends long-standing legal traditions by statute, a reviewing court must consider that break to be principally important, and should uphold its legal effect.
Notably, the Ontario court explicitly did not address what the effect would be if the parties had expressly provided that the contract would be subject to New York’s six-year statute of limitations, and left open that such a provision might run afoul of CPLR 201, which generally prevents elongation of statutes of limitation by contract.

The takeaway from this case? If you are a non-resident contracting to perform services outside of New York, and your contract stipulates that New York procedural law applies, be aware that you swallow that procedural law whole, and may be unable to contract around your home jurisdiction’s shorter statute of limitations. And more broadly, this case serves as an important lesson. It’s often the provisions that seem the most innocuous during drafting that can cause the biggest headaches later.

[1] 31 N.Y.3d 372.
[2] CPLR 213(2).
[3] CPLR 202.

CMM is proud to announce that litigator David Green has been recognized as a Super Lawyers “Rising Star,” which denotes superior professional achievement by attorneys who have been in practice for under 10 years or who are under age 40. While up to five percent of lawyers in New York State are named to Super Lawyers, no more than 2.5 percent are named to the Rising Stars list. The rigorous selection process includes independent research and peer evaluations.

David represents businesses and individuals in business disputes, personal injury, landlord/tenant, and other types of litigation.

“We’re very proud of David’s legal work and dedication to superior client service,” said CMM Partner and trial attorney Scott Middleton. “His selection as a Rising Star reflects the firm’s emphasis on recruitment and rigorous training. He has a bright future at CMM ahead of him.”

By Ken Schachter, Newsday

The largest shareholder of Hauppauge-based TSR Inc. is waging a proxy fight against incumbent management ahead of the Nov. 28 annual meeting.
Manhattan-based Zeff Capital LP issued a proxy on Oct. 17 that seeks to replace two incumbent directors with dissident candidates and roll back a shareholder rights measure announced Aug. 29.

Such measures, also known as “poison pills,” sometimes are adopted by companies to dilute the holdings of unwanted suitors in efforts to fend off hostile acquisition attempts.

Zeff Capital’s proxy also calls for an annual election for all seven board seats.

The proxy challenge by Zeff Capital, which controls about 22.3 percent of TSR common stock, is the latest move in a months-long struggle over control of the IT staffing company.

In a Sept. 19 letter to board member Raymond Roel, Zeff Capital described the poison pill as “onerous” and said that chief executive Christopher Hughes was “focused on lining his own pockets.”

Christopher Hughes, who was named TSR CEO and chairman when his father, Joseph Hughes, retired from those posts in July 2017, said Monday he would have “no comment right now.”

In June 2018, Joseph Hughes and his wife, Winifred Hughes, sent a letter to TSR’s board calling for the company to be sold. The following month they sold their 41.8 percent stake to Zeff Capital and two other institutional investors.

“Family companies are great–while they work,” said Christine Malafi, a partner at Ronkonkoma-based Campolo, Middleton & McCormick LLP. “It’s family, which doubles the emotions.”

Zeff Capital and the other two investors, QAR Industries Inc., based in Mineral Wells, Texas, and Fintech Consulting LLC, based in Iselin, New Jersey, together now own about 48 percent of the common stock, according to Bloomberg.

When asked Monday about the proxy battle, Daniel Zeff, president of Zeff Capital, said, “I can’t comment at this time.”

Shares of TSR rose 4.5 percent Monday to close at $5.85. Twelve months ago, the stock was trading at $4.95.

To defend its decision to adopt a poison pill, management should communicate its strategic plans to stockholders, “if nothing more than to shed light on its opposition to Zeff,” said Greg Stoller, a partner at Lake Success-based law firm Abrams, Fensterman.

Malafi said proxy fights “are expensive” as costs for legal advice and soliciting proxies from shareholders can mount.

In the quarter ended Aug. 31, TSR reported net income of $37,795 on revenue of $16.6 million. That was down from net income of $141,089 on revenue of $17 million in the year-earlier period.

TSR, founded in 1969, has offices in Hauppauge, Manhattan, and Edison, New Jersey. It provides IT staffing services to the utility, insurance, publishing, pharmaceutical and financial services industries.
Read the full article here.