In mergers and acquisitions (“M&A”) transactions, one of the most debated issues during contractual negotiations concerns the representations and warranties provided by the seller under the share purchase agreement (“SPA”). A representation refers to the seller’s statements describing the legal, financial, and operational status of the company, while a warranty refers to the seller’s undertaking to be held liable if such statements prove to be inaccurate.
Through these provisions, the seller not only discloses information regarding the company’s condition but also accepts liability for any damages that may arise if the disclosed information is found to be untrue. Thus, while providing assurance to the buyer about the target company’s situation, the basis for risk allocation between the parties is also established. Although not explicitly regulated in Turkish law, representations and warranties, which find application within the framework of the provisions of the Law of Obligations and contractual freedom, have become indispensable in Mergers and Acquisitions M&A practice.
Purpose of the Seller’s Representations and Warranties
Due to the inadequacy of the legal liability regime in the field of company acquisitions, the parties prefer to comprehensively regulate the matters for which the seller is liable and the consequences of any breach in the share purchase agreement.
Through the due diligence process, the target company’s financial and legal status is thoroughly examined, potential risks are identified, and negotiations are conducted to determine which of these risks will be assumed by the seller. The matters for which the seller ultimately accepts liability as a result of these negotiations are incorporated into the SPA as representations and warranties.
These provisions ensure legal clarity regarding how the risks of the target company arising from the acquisition will be shared between the parties, thereby preventing potential disputes that may arise after closing.
Subject Matter of the Seller’s Representations and Warranties
The subject matter of the seller’s representations and warranties may vary depending on the target company’s operations and asset structure. Nevertheless, they generally cover core matters that may affect the validity and enforceability of the transaction.
Representations and warranties concerning the seller’s capacity, the incorporation and legal status of the target company, and the ownership of the shares subject to transfer are defined as fundamental representations and warranties and are generally not subject to provisions limiting the seller’s liability in the share purchase agreement. For instance, while the seller’s general liability for breach of representations and warranties is often limited to a period of 12 to 24 months following closing, liability for breaches of fundamental representations and warranties may extend up to ten years and is not capped by any liability limit.
In addition, representations and warranties relating to the financial statements of the target company, its ongoing litigation and other legal proceedings, the permits and licenses required for its operations, any undisclosed liabilities not reflected in the financial statements, and its tax compliance are among the most critical provisions in almost all M&A transactions.
Legal Nature of the Seller’s Representations and Warranties
One of the most frequently negotiated issues in SPAs concerns the legal nature of the seller’s representations and warranties. If a representation describes the characteristics or condition of the shares or the business as of the date of the agreement, it is regarded as a warranty of quality under Turkish law. Conversely, if it provides a forward-looking assurance or a commitment covering risks beyond the seller’s control, it constitutes a warranty undertaking.
This distinction determines which set of liability provisions will apply. In cases where a representation qualifies as a warranty of quality, the defect liability provisions of the Turkish Code of Obligations (“TCO”) apply. Where the warranty qualifies as a warranty undertaking, the general provisions on breach of contract become applicable. Accordingly, in the case of a defect-based breach, the buyer may exercise its remedies for defects within the contractual limitations, whereas in the case of a warranty breach, the buyer may directly claim compensation.
In practice, share sale agreements often detail the consequences of breaches alongside the seller’s representations and warranties, so this theoretical distinction rarely makes a significant difference in practice.
Limitations on Representations and Warranties
In share purchase agreements, the duration of the seller’s liability arising from their representations and warranties must be clearly specified. This period is an important part of the negotiations between the parties and is crucial in preventing future disputes.
As a general rule, claims for damages under the TCO are subject to a ten-year limitation period, while the seller’s liability for defects is limited to two years. Moreover, if the buyer’s own conduct gives rise to the relevant risk, the seller’s liability is deemed to have ceased. With respect to third-party claims and post-closing liabilities, SPAs typically contain detailed procedural provisions regulating the parties’ responsibilities. In addition, it is common practice for the agreement to specify that the seller shall be liable only for the representations and warranties expressly set out in the written agreement, and that any other statements, projections, or explanations made by the seller or its advisors in the course of negotiations shall not be binding. This serves as an important safeguard for the seller, preventing statements made by various representatives during the acquisition process from creating additional liability after closing.
For further details on the limitations of the seller’s liability under share purchase agreements refer to our article on “Limitation of the Seller’s Liability in Share Purchase Agreements” here.
Conclusion
In conclusion, the seller’s representations and warranties are one of the fundamental elements that strengthen the relationship of trust between the parties in share sale agreements and balance the sharing of risk. Careful drafting of these provisions clarifies the limits of the parties’ rights and obligations in the post-closing period, thereby enhancing transaction security and preventing potential disputes.
In every merger and acquisition transaction, the scope, duration and legal consequences of representations and warranties should be determined according to the specific needs of the parties; and negotiations on these matters should be conducted with both legal and financial diligence.
Please refer to the book written by our managing partner Dr. Zahide Altunbaş Sancak for a detailed analysis of the seller’s representations and warranties and an in-depth discussion of their application under Turkish law.