By: Luis Gerardo Ramírez Villela.
Mergers and acquisitions transaction have been increasing throughout the time and although primarily were based on cross border transaction documents, primarily from the United States of America, nowadays the structure of the agreements has been adjusted to applicable laws and standard practices in Mexico.
In this respect, the due diligence performed by external advisors is important for the establishment of the corresponding representation and warranties sections under the corresponding purchase agreement (whether stock or assets) and therefore it is important to be diligent during such process and to coordinate all teams (accounting, financial, legal and tax) to understand any potential risks that could have an impact in the transaction.
The due diligence report to be delivered must contemplate the main risks identified in the due diligence process, proposing possible solutions and advising on the possible consequences if these risks have no solution.
Once the due diligence report has been reviewed, the corresponding agreement will require to be structured covering all potential risks and evidencing all findings under the representations and warranties, including the schedules corresponding to each of them.
Customary representations and warranties for this type of transactions will be included in the definitive agreement, including but not limited to: (a) organization; (b) no conflict; (c) governmental consents and approvals; (d) financial information; (e) litigation; (f) compliance with laws; (g) intellectual property; (h) real estate property; (i) employee and labor matters; (j) taxes; (k) material contracts; (l) environmental matters; (m) insurance; and (n) transactions with affiliates (if applicable). 1
External advisors will then have to coordinate the review of the corresponding schedules and determinate whether the representations and warranties under the corresponding purchase agreement are true and correct and adjust them prior to execution and, if the transaction is subject to a closing and post-closing process, determine a price adjustment mechanism to the extent necessary.
Survival of representations and warranties is frequently negotiated between 18 (eighteen) and 48 (forty-eight) months, depending on the nature of the representations and warranties, except for fundamental representations which shall survive for the applicable statute of limitation. The specific survival term will depend on the result of the due diligence and the negotiations amongst the potential purchaser and the seller.
Please note that in all cases, the external advisors must review and draft jointly the representations and warranties and review the corresponding disclosure schedules to avoid any potential conflict in the future and to identify any misrepresentations that could potentially arise.
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1 This representations and warranties correspond to a stock purchase transaction and those corresponding to an asset purchase transaction may be different.
