M&A Breaches of Representations or Warranties and Claims against Escrow - dummies

M&A Breaches of Representations or Warranties and Claims against Escrow

By Bill Snow

In a typical M&A purchase agreement, Seller provides Buyer with a slew of promises known as representations (reps) and warranties. A breach occurs when Buyer disputes one of those reps or warranties. Essentially, Buyer is claiming, “The business wasn’t as I thought it was.”

Common disputes can include undisclosed pending litigation, financial statements with mistakes or omissions, an undisclosed material liability (such as a large unpaid bill of the company), and illegal immigrant employees.

If Buyer claims a breach of a representation or warranty, she usually makes a claim to money held in escrow. But escrow is only Buyer’s first recourse. If the breach is egregious enough, Buyer may end up suing Seller.

The purchase agreement defines Buyer’s recourse. If Buyer suspects Seller of breaching the purchase agreement, Buyer should immediately speak with her attorney.

The myriad representations and warranties Seller provides Buyer in the purchase agreement forms the basis of what, if anything, Buyer can claim against escrow. In other words, if something Seller says is inaccurate or false and causes harm to Buyer, Buyer can make a claim and recoup money from the escrow account.

If Buyer discovers a problem or suspects a breach by Seller, Buyer usually informs Seller, and Seller has some amount of time to either reimburse Buyer for the damage or to contest the damage. If Buyer and Seller are unable to settle the issue, the issue may go to court.

The purchase agreement lays out the process for Buyer to make claims against escrow as well as the recourse for Seller to dispute those claims. Consult with your attorney about how best to proceed with making a claim against escrow or disputing a claim.