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Understanding M&A Concepts – Reps and Warranties: Worth the Hype?
Author: Roxana Sandulescu
In the complex world of mergers and acquisitions (M&A), whether you are an M&A consultant, corporate lawyer, business executive, founder, or investor, one of the crucial concepts you inevitably encounter is representations and warranties – often referred to as reps and warranties.
In the shares sale-purchase agreements (“SPAs”), representations and warranties define the expected state of both the buyer and the target company at the time the contract is signed and upon closing. They serve as an assurance to the buyer that the company being acquired is in a certain state, as represented by the seller. These clauses outline the seller's guarantees and provide a mechanism for the buyer to seek remedies if those representations turn out to be false or incomplete.
While reps and warranties are fundamental in M&A transactions globally, the way they are treated can vary significantly from one jurisdiction to another.
Therefore, understanding this concept in line with the Romanian law is crucial when involving in M&A deals, as the local legal context may introduce certain nuances that differ from international practices.
The application of reps and warranties in Romania is subject to a unique legal landscape, and here lies the debate: How far does the seller’s liability extend under Romanian law?
The Romanian Civil Code offers two essential guarantees from the seller regarding the shares being sold: protection against eviction (ensuring that the seller holds rightful ownership of the shares) and assurance against hidden defects (confirming that the shares were properly issued and subscribed).
Therefore, even if no reps and warranties are included in the SPA, the seller will still be liable under the law for certain aspects related to the shares. However, the extension of these legal guarantees to the actual substance or value of the shares—namely, the business or economic performance of the target is debatable. Here is why:
While certain doctrinal opinion argues that as regards the seller’s guarantee against hidden defects, shares’ value is derived from the target’s value, as determined by the corporate rights each shares confers under the law and the articles of incorporation, and, the patrimonial rights attached to the shares are directly correlated with the economic performance and financial condition of the company, the Romanian High Court of Cassation of Justice (the “High Court”) has formulated a distinct opinion.
In this respect, the High Court acknowledged that while the applicable law does not impose an obligation on the seller to guarantee a company’s assets in a shares sale, a clause expressly covering the assets of the company is not prohibited and remains valid under the principle of contractual autonomy.
In this specific case, the High Court has limited the seller’s warranty only to the assets specifically listed in the reps and warranties appendix, while the buyer was requesting indemnity for another target’s asset which was not expressly mentioned in the said appendix.
Therefore, it might be construed that the High Court’s opinion outlines the necessity to conventionally extend the seller’s warranty to the target’s assets, otherwise, the Romanian Civil Code only providing protection in relation to the actual shares.
However, the legal perspective expressed by the High Court was formulated under the former Civil Code – not currently applicable.
In this context, in the absence of specific representations and warranties dealing with the target’s economic status, there is a risk that Romanian law might be interpreted as offering protection only in relation to the actual shares, without extending any guarantees to the financial condition, assets, or business performance of the target company.
This means that, unless expressly stipulated in the SPA, the buyer may have limited recourse if undisclosed liabilities, operational risks, or financial discrepancies arise post-transaction.
So, are reps and warranties worth the hype? In many cases, yes. But, like all tools in M&A transactions, their value lies in how they are used, negotiated, and tailored to fit the specific circumstances of the deal.
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