Bring-Down Certificate of Representations and Warranties
The Bring Down Certificate is Essential to Surviving the Doctrine of Merger
A question often asked regarding the necessity of the bring-down certificate goes like this: why is it necessary for representations and warranties to be confirmed once again in a bring-down certificate on the closing date, if all these statements have already been set out in the agreement between the parties?
Because of the doctrine of merger, an old common law principle in contract law.
Bring-Down Certificate of Representations and Warranties
The doctrine of merger states that all prior negotiations, statements and agreements – including the purchase agreement – are deemed merged on the closing when the purchase agreement comes to an end. This means from the date of closing, these important reps and warranties that induced the purchaser to enter into the agreement and buy the business will no longer be binding on the seller.
To ‘bring down’ warranties
Warranties are made as of a particular moment in time. That moment can be the signing date of the contract, the closing date of the transaction or any other date provided for in the contract. Without further specification, a warranty will be deemed to be made on the date that the relevant product is delivered. Warranties that are deemed to be repeated on a later date are referred to as being brought down.
Bringing down warranties is usually required at times when a significant event occurs under an agreement. For example, a share purchase agreement may provide for completion of the transfer only after the required approvals are obtained; the purchaser will require the seller to bring down its warranties at the closing. This bring-down implies an extra incentive for the seller to make sure that the quality of the transferred business remains as it was at the signing date by leaving any deterioration for the account of the seller.
Warranty bring-downs are also found in other types of agreement. In master sale agreements with ongoing deliveries of products pursuant to purchase orders, the purchaser needs the warranties to be made as of each delivery date. Similarly, a borrower is required to bring down its warranties to the lender each time it draws under a loan or credit agreement. If a warranty in a credit agreement provides that all of borrower’s subsidiaries are listed in a schedule, the bring-down of that warranty may become impossible (and rightfully so): when new subsidiaries are created or acquired, the creditworthiness of the borrower will probably change. In such cases, additional drawings cannot be made without violating the warranty, unless a specific waiver is obtained or an appropriate amendment made to the schedule. Obviously, such waiver or amendment will trigger the lender to scrutinize the creditworthiness of the borrower after creating or acquiring the subsidiaries.
For this reason, a bring-down certificate is required. A bring- down certificate quite simply ‘brings down’ the covenants of representations and warranties from the purchase agreement to a separate document that survives for several years after closing.
The bring-down certificate can be seen as a way around the doctrine of merger in the sense that it permits the representations and warranties to survive after closing. In this way, the purchaser will have the ability to sue the seller of the business should any of the reps and warranties later turn out to be untrue.
For this reason, a Certificate of Representations and Warranties, or a Bring-Down Certificate, is an essential document to any closing.
Survival of warranties
Other than the bring-down of warranties at some future moment in time, there is also the concept of warranties ‘surviving the closing of a transaction’. Survival of the warranties in fact refers to the right of the purchaser to claim under those warranties. Normally, the seller will limit this right by stipulating that all claims related to a warranty being incorrect must be made (or made known) within a certain period of time. In such case, it is appropriate to distinguish between the various types of warranties. Accordingly, short periods would apply to running business and tangible assets, whilst warranties related to real estate and environmental contamination would probably be subjected to longer periods. Warranties related to taxation are often subject to the statutory period during which tax authorities may continue to impose taxes related to the period before closing of the transaction.
It is important that sellers and purchasers have an experienced business lawyer draft a contract’s representations and warranties for all business contracts. These are important for ordinary business contracts and M& A contracts alike.
Ordinary course business contracts must that attest to the fitness and merchantability of a product. The former refers to a product’s fitness to fulfill the purpose for which the product will ordinarily be used, while the merchantability refers to the freedom of the purchaser to sell the product to third parties (and such third parties’ freedom to use it without infringing another person’s rights).
M&A Contracts generally include warranties and representations relating the owner’s contractual capacity and authority to enter an agreement; subject matter warranties, attesting to what the purchasing party may reasonably expect with a certain context ( i.e. a sold property is free of encumbrances; a software is free of viruses; products are free of material defects; a patent license does not infringe other (pre-existent) patented technologies; and a share purchase agreement includes warranties that the target company has paid all taxes in a timely manner); and warranties about the parties themselves, attesting to financial condition of the party and in particular its creditworthiness.
Whatever the nature of the contract, you want to be sure that all warranties and representations protect your interests, whether you are the seller or purchaser and that these warranties and representations survive or are brought down to a later period that will reasonably protect your investment.
-Shira Kalfa, BA, JD, Partner and Founder
© Kalfa Law, 2020
The above provides information of a general nature only. This does not constitute legal advice. All transactions or circumstances vary, and specified legal advice is required to meet your particular needs. If you have a legal question you should consult with a lawyer.