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← Series 79: M&A, Tender Offers & Restructuring
Series 79 practice questioneasyRepresentations and Warranties

In an acquisition agreement, representations and warranties primarily serve to:

  1. AAllocate risk between buyer and seller by establishing the factual basis on which the deal is made and providing a remedy if those facts prove untrue✓ Correct answer
  2. BGuarantee the future profitability of the target company
  3. CEliminate the need for due diligence
  4. DSatisfy SEC filing requirements
Explanation

Why A — Allocate risk between buyer and seller by establishing the factual basis on which the deal is made and providing a remedy if those facts prove untrue

Representations and warranties are statements of fact made by each party about themselves, their business, and the transaction. They serve to allocate risk by defining the factual assumptions underlying the deal and providing the other party with a contractual remedy (typically indemnification) if those statements prove to be inaccurate. They also incentivize disclosure by creating liability for misstatements and guide the buyer's due diligence process.

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