Survival of Reps and Warranties: Avoiding Unpleasant Surprises for Buyers

by Mintz Levin
Contact

Background

Survival of representations and warranties (“reps and warranties”) is among the staples of highly negotiated provisions in M&A purchase agreements. The length of the survival period limits the time during which claims may be brought for breaches of reps and warranties. When negotiating such survival periods, it is critical to understand the role of the applicable statutes of limitations. Failure to do so can potentially leave the unwary buyer without recourse for breaches of reps and warranties, despite express wording in the purchase agreement to the contrary.

Survival of Reps and Warranties

Reps and warranties are often subject to varying survival periods set forth in a “survival clause.” For example, general reps and warranties as to the condition of the target’s business, assets and operations — e.g., financial statements, contracts, employees, insurance and permits — are often subject to the shortest survival period, typically ranging from 6 to 24 months from the closing of the transaction and often coterminous with the escrow period in deals with an escrow. Reps and warranties involving certain governmental matters — e.g., taxes and sometimes environmental matters — are commonly intended to be subject to survival periods tied to the underlying statute of limitations for the government or other entities to make claims in connection with such reps and warranties. “Special” or “fundamental” reps and warranties — e.g., capitalization, lack of broker involvement, good standing, enforceability and authority to transact business — are often intended to be subject to purportedly “indefinite” survival periods. As discussed below, however, these longer survival periods are not always enforceable.

The Impact of Applicable Statutes of Limitations on Survival of Reps and Warranties

A statute of limitations operates to limit the time during which a claim may be brought against a party. If a purchase agreement is silent as to survival, reps and warranties survive until the applicable jurisdiction’s statute of limitations for claims for breach of contract lapses. If a survival clause is included in the purchase agreement, whether or not it is enforceable will depend on its wording and the law of the jurisdiction; but as a general rule, the survival clause may have the effect of shortening the default statute of limitations for breach of contract, but it may not extend survival beyond it.

Statutes of limitations for claims for breach of contract vary considerably by jurisdiction. When negotiating purchase agreements, care should be taken to understand the effect of different jurisdictions’ laws on the survival of reps and warranties. Delaware, for example, has a 3-year statute of limitations, while California has a 4-year statute of limitations. In contrast, in New York and Massachusetts, the statute of limitations is 6 years. This means that as a practical matter, for example, notwithstanding a reference to any longer “applicable” statute of limitations under the tax code (i.e., the period in which the IRS could assess an additional tax liability for a pre-closing period) for the survival of tax reps and warranties in a purchase agreement, the period during which a buyer may make claims on a breach of such tax reps and warranties will terminate in 3 years under Delaware law and in 6 years under New York law, regardless of the underlying applicable statute of limitations period.

Tolling

Similarly, M&A purchase agreements typically provide that if a claim is properly made within the specified survival period, the statute of limitations applicable to such claim will be tolled or suspended until such claim is fully settled and resolved. Again, notwithstanding such contractual language, the statute of limitations may in fact apply and any such suit brought after the expiration of the statute of limitations (even if notice of the claim was timely delivered) may be time-barred.

Extending the Applicable Statute of Limitations with Infrequently Used “Sealed” Contracts

With careful drafting, appropriate jurisdiction selection and the use of a “sealed” contract, it is possible to draft purchase agreements with reps and warranties enforceable for the terms intended by the parties. Buyers, of course, will favor longer survival periods, and if such longer terms are negotiated, ensuring that these survival clauses are enforceable is vital.

Delaware law, for example, provides for a 20-year statute of limitations for contracts complying with the requisite formalities to constitute an agreement executed “under seal.” Such 20-year period can then be reduced to the desired length for each rep and warranty. Thus, if the purchase agreement is properly executed “under seal,” the survival provision can specify that (i) the general reps and warranties shall survive for, say, 18 months, (ii) the tax reps and warranties shall survive for 6 years plus 60 days, (iii) the fundamental reps and warranties shall survive for 20 years and (iv) any claim with respect to which notice is properly delivered may survive for the specified time period negotiated by the parties (provided such time period is not longer than the 20-year anniversary of the contract). Execution under seal also extends the statute of limitations to 20 years for contracts governed by Massachusetts law but has no effect on contracts governed by New York or California law. The formalities required to execute a contract under seal vary by jurisdiction.

As discussed above, when negotiating survival provisions in purchase agreements, it is important to not only understand the interplay between the survival period set forth in the purchase agreement and the applicable statute of limitations, but to also consult an expert in the event of any uncertainty in order to ensure that the parties’ intended negotiated terms are not only reflected in the purchase agreement, but also are enforceable. For further information, please contact the authors of this alert or your regular counsel at Mintz Levin.

Post Script

The Delaware legislature has recently proposed revisions to the Delaware law governing the 3-year statute of limitations for breach of contract that would, if adopted, permit parties to certain contracts to opt out of the 3-year statute of limitation period that would otherwise apply and give effect to a longer limitations period (up to 20 years) without requiring the parties to enter into a contract “under seal.”

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Mintz Levin | Attorney Advertising

Written by:

Mintz Levin
Contact
more
less

Mintz Levin on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.
Feedback? Tell us what you think of the new jdsupra.com!