Seller Warranties: Financial Information

October 18, 2024

by a searcher from The University of Texas at Austin - Red McCombs School of Business in Scottsdale, AZ, USA

I'm negotiating a purchase contract on a $4M (purchase price) deal. The seller's counsel is placing a knowledge qualifier on all financial related warranties (ie. "to Sellers' knowledge, the financial information is complete and accurate in all material respect.") Obviously my counsel and I think that knowledge qualifier should be removed.

Financial DD was clean and I had a QofE report done with no adverse findings so I'm not overly concerned with the financial info other than the general fact that I can't diligence out all risk.

Anyone have insight on whether financial info knowledge qualifiers are 1) definitely not appropriate, 2) common in deals this size, or 3) it's a mixed bag and you get what you can negotiate?

Reply by an investor
from University of Pennsylvania in Charlotte, NC, USA

Thanks for the tag ^redacted‌. Great points by the lawyers above. This is all about risk allocation and the particular circumstances of your transaction need to be taken into account in considering what is appropriate...and whether this is a hill to die on. I hope the lawyers would agree, you have to look at the entirety of the agreement: definition of knowledge (actual, constructive, etc.), indemnification provisions, materiality scrape (or double scrape) language, "full disclosure"/10b-5 language, or on the other hand "no implied" reps" language, and so on. In my experience "financial information" may be a problematic term unless defined in the agreement. Bottom line - if your counsel is not a transactions specialist, you may want to consult one.

Reply by a professional
from University of Michigan in Detroit, MI, USA

^redacted‌ I've certainly seen materiality qualifiers in financial rep. How is seller's knowledge defined? If seller is saying "to the best of my constructive knowledge, everything is complete and accurate," it's hard to justify the materiality qualifier too. That said, you could just side-step the entire issue and suggest alternative language . Something like "The financial statements fairly present the financial condition of the business as of the respective dates they were prepared and the results of the operations of the Business for the periods indicated." This is really what you're getting at, right?

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