Compliance with Laws Representation - Materiality Standard - Material Adverse Effect
Material Breach of Any Law
Any Breach of Material Law
Material Breach of Material Law
Today, I’ll talk about another Materiality Qualifier, one in which the person making the representation (in this case, the seller) doesn’t have to make the disclosure unless the disclosed fact, situation or circumstance has or is expected to have a material adverse impact on the disclosing person’s business. For an otherwise fastidious seller, this eases the paranoia it might have about the consequences of making an honest mistake in forgetting to list trivial “parking ticket” type violations. For the reasonable purchaser, this representation should be sufficient to give it a heads up of violations that really matter so that it can walk away from the transaction or remediate and negotiate a price adjustment.
Again, here’s the “flat” unqualified representation that the purchaser would like the seller to make…
“The Seller is not in breach or violation of any….. law, regulation or other rule of any government authority or ruling or other determination of any court or other tribunal to which the Seller, or with respect to which any of its assets or business, is subject.”
Here is the revised representation. The underlined language contains both a List the Exceptions qualifier and the Materiality Qualifier discussed above.
“The Seller is not in breach or violation of any….. law, regulation or other rule of any government authority, … except as disclosed in attached Exhibit A or to the extent that any such breach or violation does not or could not reasonably be expected to have a material adverse effect on the assets, business, financial condition or prospects of the Seller.”
Keep in mind that this version is no panacea for either party. Fact is, you might still end up in court arguing about whether something should’ve been disclosed based on the meaning of “material adverse effect”. But, you can learn something about your counterparty even from the process of negotiating this provision. For example, if you are the purchaser, and the seller insists on a qualifier, that’s a good opportunity to find out why. And if you’re the seller, and the purchaser is insisting that you make all of your representations “flat”, that might be a good sign that the purchaser is going to be tough to deal with (and possibly litigious) in general.
