asset acquisitions - Jackson Walker LLP

this assumption. If a seller has subsidiaries, the buyer’s draft needs to elicit informationregarding the subsidiaries.The seller’s representations also provide a foundation for the buyer’s right toterminate the acquisition before or at the closing. After the signing of the acquisitionagreement and before the closing, the buyer usually undertakes a due diligence investigationof the seller. Detailed representations give the buyer, on its subsequent discovery of adversefacts, the right not to proceed with the acquisition, even if the adverse facts do not rise to thelevel of common law “materiality” defined by judges in fraud and contract cases (see Section7.1 and the related Comment).Finally, the seller’s representations affect the buyer’s right to indemnification by theseller and the shareholders (and other remedies) if the buyer discovers a breach of anyrepresentation after the closing (see Section 11.2 and the related Comment). In this regard,the seller’s representations serve as a mechanism for allocating economic risks between thebuyer and the seller and the shareholders. Sellers often resist the argument thatrepresentations simply allocate economic risk on the basis that civil and criminal liabilitiescan result from making false statements. The buyer will typically request that theshareholders’ indemnification obligations be joint and several; as to this and the allocation ofresponsibility among the shareholders, see the Comment to Section 11.2.Scope of Seller’s Representations: The scope and extent of the seller’srepresentations and warranties largely will be dependent upon the relative bargaining powerof the parties. Where there is competition for a seller or the acquisition presents a particularlyattractive opportunity, the buyer might scale down the representations so as not to adverselyaffect its ability to make the acquisition. In scaling down the representations, considerationmust be given to their relative benefit to the buyer in terms of the degree and likelihood ofexposure and their materiality to the ongoing business operations.The representations and warranties will also reflect particular concerns of the Buyer.In some cases, these concerns can be satisfied through the conduct of due diligence withouthaving to obtain a specific representation. In other cases, the Buyer will insist uponadditional comfort from the Seller through its representations backed up by indemnification.The representations in the Model Agreement are based on the Fact Pattern, whichcharacterizes the Seller as a manufacturer with a full range of business activities, includingadvisory and consulting services provided to customers. The representations would looksomewhat different if the Seller were strictly a service provider. Similarly, representationsoften are added to address specific concerns that pertain to the industry in which the selleroperates. For example, representations concerning the adequacy of reserves would beappropriate for an insurance company and representations concerning compliance withcertain federal and state food and drug laws would be appropriate for a medical device ordrug manufacturer. The Fact Pattern indicates that the Seller has no subsidiaries. If it were tohave subsidiaries that are part of the Assets being acquired by the Buyer, the representationsshould be expanded to include their organization, capitalization, assets, liabilities andoperations. An example of the incorporation of subsidiaries in the representations and incertain other provisions of an acquisition agreement can be found in the MODEL STOCKPURCHASE AGREEMENT WITH COMMENTARY. Similar changes should be made forany partnerships, limited liability companies or other entities owned or controlled by theSeller. The scope of the representations also changes over time to address current issues.Examples are the extensive environmental representations that began to appear in the late3148166v1- 69 -