Often overlooked, the “Representations and Warranties” section is essential in M&A and financing agreements involving Brazilian parties, especially during and post-pandemic.
Through the “Reps”, as they are called, sellers (in equity transactions) and borrowers (in financings) issue statements for the benefit of buyers and lenders, respectively, that (i) the company is properly constituted and operating, (ii) the business does not conflict or generate an event of default with other contracts, (iii) the company is in compliance with labor, environmental and anti-corruption laws, (iv) the company is not a party to legal/administrative proceedings, except as otherwise disclosed, (v) the company holds all licenses, (vi) the company owns its intellectual property and know-how, among other material statements.
Buyers and lenders may also be required to make representations, although the scope is more limited.
The “Reps” section must be directly linked to the contractual section (i) of “Indemnification” (in M&As) and (ii) of “Events of Default” (in financing). In these, the parties must foresee the consequences of the inaccuracy or falsehood of a representation made, including, in the case of equity transactions, if there will be obligation to indemnify, and a limitation in value (cap) and term, and in the case of financing, if they will result in acceleration of the outstanding debt.
The scrutiny of the “Reps” gained even more momentum during the novel coronavirus and is expected to intensify.
It is essential that parties involved in domestic and cross-border M&A and financial transactions pay special attention to this section, which has the potential to make the deal business viable or unfeasible.