Author: Yağmur Zeytinkaya Öztürk
Introduction
Merger and acquisition processes are one of the legal processes that most seriously affect the identities and legal status of companies. After the completion of legal, tax, financial and operational due diligence reports, the parties initiate the negotiation process in case they reach an agreement on proceeding with the transaction. In almost all of the negotiation processes, the buyer and seller parties have contradictory demands (e.g. purchase price, liability of the seller, scope of representation and warranties and disclosure letter). Due to the desire of the parties to persuade each other into these contradictory demands, the arising conflicts may even lead to “pencils down” in the project if the negotiation processes are not managed sensitively. “Representation and warranties” that are included in share transfer agreements, which is one of the most important components of mergers and acquisitions, is one of the most discussed topics in this process. Representation and warranties, which can also be considered as the commitments of the seller regarding the company, also determine the seller's area of responsibility within the scope of the transaction. If the parties cannot agree on this area of responsibility, representation and warranty insurance (“R&W Insurance”) can be considered as an alternative solution.
Importance of Representation and Warranties in Merger and Acquisition Processes
After the merger and acquisition processes reach a certain maturity, the parties begin to negotiate on the share purchase agreement. Share purchase agreements, which constitute the promissory part of the merger and acquisition process, contains various regulations regarding the terms of sale and transfer, closing transactions, as well as the nature of the target company. The most important of these are the representation and warranties, which can be considered as commitments about the company.
The representation and warranties are evaluated in two different groups as general and special ones. General representation and warranties are mainly related to fundamental matters such as that the shares subject to sale are duly issued by the target company, that the share certificates, if any, are duly issued and that the company's shares are free from any encumbrances. Special representation and warranties, on the other hand, are drafted in a "tailor-made" manner, according to the nature of the company and the company's field of activity. For example; in software companies, representation and warranties regarding the intellectual property rights of the software have a significant role. On the other hand, for energy companies, representation and warranties regarding their permits and licenses and environmental issues have a higher importance.
