Representations and Warranties: What are they, and why do they matter?
Representations and warranties are contractual promises made by a seller about the condition of a business. In Hong Kong M&A deals, they are one of the most important buyer protections, providing assurance on everything from financial statements to regulatory compliance.
Why Reps and Warranties Matter
In any acquisition, the buyer wants certainty about what they are purchasing. Reps and warranties:
- Act as SME M&A safeguards HK by reducing the risk of hidden liabilities.
- Give buyers a legal remedy if the business is not as represented.
- Provide a framework for disclosure — if a seller cannot give a warranty, it must be carved out in the disclosure letter.
Common Warranties in Acquisitions HK
1. Corporate Matters
- Confirmation of incorporation, ownership of shares, and compliance with the Companies Ordinance.
2. Financial Statements
- Assurance that accounts are true, complete, and prepared according to recognised standards.
3. Contracts and Obligations
- Warranties that major contracts are valid and enforceable, with no undisclosed breaches.
4. Employment and MPF
- Confirmation that employment contracts comply with Hong Kong law and Mandatory Provident Fund (MPF) contributions are up to date.
5. Regulatory and Litigation
- Statements that licences are valid and there are no ongoing disputes or investigations.
6. Intellectual Property
- Warranties around ownership of trademarks, patents, and technology rights.
What Buyers Should Know
- Materiality: Not every breach justifies a claim; contracts often limit liability to “material” breaches.
- Time limits: Claims under warranties may only be brought within a set period, commonly 12–24 months.
- Caps and thresholds: Sellers often negotiate financial limits on liability.
For SMEs, reviewing these Hong Kong M&A contract terms with specialist advisers is essential to avoid overexposure.
Linking Disclosure and Buyer Protections
Warranties and disclosure letters work together: warranties create a high standard, while the disclosure letter lists exceptions. This gives transparency and limits future disputes.
For more detail on how disclosure works, see our blog on Disclosure Letters in Hong Kong Acquisitions.
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