Representations and Warranties in Indian Acquisition Agreements: What Gets Negotiated

Representations and warranties are the heart of any share purchase agreement. They are the seller's factual statements about the target company, and they form the basis on which the buyer assesses the risk of the acquisition. When a representation turns out to be false, the buyer has a claim against the seller for the loss caused by that inaccuracy.

Understanding how representations and warranties are negotiated in Indian M&A transactions, what qualifiers are typically accepted, and how the indemnity framework works is essential for both buyers and sellers.

The Scope of Representations

Representations in an Indian acquisition agreement typically cover the corporate status of the target, its authorised and issued share capital, title to the shares being sold, the accuracy of the financial statements, the absence of undisclosed liabilities, the status of material contracts, employment matters, intellectual property, real property, tax compliance, regulatory compliance, and litigation.

The scope is negotiated. Sellers try to narrow each representation. Buyers try to broaden it. The final scope reflects the relative bargaining power of the parties and the outcome of the due diligence process.

Materiality Qualifiers

Sellers routinely seek to qualify their representations with materiality qualifiers. A representation that "all material contracts are in full force" limits the seller's exposure to contracts that are material, rather than every contract of the company. The word material does significant legal work, and its meaning in context is frequently contested.

Indian acquisition agreements sometimes define material by reference to a specific threshold (contracts above a certain value, for example) and sometimes leave it undefined, which creates ambiguity. Buyers prefer defined thresholds. Sellers prefer undefined materiality because it gives them more room to argue that a breach was not material enough to give rise to a claim.

Knowledge Qualifiers

Sellers also commonly seek to qualify representations with knowledge qualifiers. A representation qualified by the seller's knowledge means the seller is not liable if the relevant fact was unknown to the seller, even if the fact was objectively verifiable. Knowledge qualifiers significantly reduce the protection provided by the representation.

The key issues are who constitutes the seller for this purpose (just the individual selling shareholders, or also the management of the target company) and whether the knowledge standard is actual knowledge or constructive knowledge (what the relevant persons should have known on reasonable enquiry). Buyers prefer the knowledge test to be based on a broad group of individuals and to include constructive knowledge.

The Indemnity Framework

The indemnity provisions set out the consequences of a breach of a representation and the limits on the seller's liability. Key provisions include the de minimis threshold (the minimum value of a single claim below which no claim can be made), the basket or deductible (the aggregate value of claims that must be exceeded before any claim is payable, either on a tipping or first-dollar basis), and the cap (the maximum aggregate amount the seller can be required to pay in respect of all claims).

In Indian M&A, indemnity caps are typically set at between 10% and 100% of the purchase price, depending on the size and nature of the transaction and the results of due diligence. For tax and specific identified risks discovered during due diligence, specific indemnities are often negotiated outside the general cap.

Survival Period

Representations survive completion for a limited period, after which no new claims can be brought. General representations typically survive for 18 to 36 months. Tax representations and fundamental representations (relating to title, capacity, and authority) typically survive for longer, often the full period of applicable limitation.

Sellers want short survival periods to give them certainty that their potential liability will not drag on indefinitely. Buyers want longer periods to allow time for issues to emerge and claims to be identified after completion.