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Minimizing the Risk of Litigation: Acquisitions

In an acquisition, part of a buyer’s goal is to make as informed a decision as possible and to close the deal efficiently and inexpensively. Costly, post-acquisition litigation is the last thing any party to a transaction wants. So, how can litigation be avoided? The short answer is . . . it can’t. Despite the best intentions of the involved parties and the resources put into a deal, disputes will always arise. However, the risk of litigation can be minimized (and the potential success of a deal maximized) through the combined use of thorough due diligence and strong representations and warranties in the purchase agreement.

Due diligence as an effective tool 

Due diligence is a prospective buyer’s investigation and review of a target company or property. Its object is to obtain public and non-public information to ensure the target is what the buyer thinks it is. It can include inspections, interviews, and reviewing documents related to the target’s financials, legal and regulatory issues, assets, leadership, and industry.

There are several benefits to performing thorough due diligence. Primarily, it helps the buyer avoid unpleasant surprises that, if found too late, could sink the deal’s profitability or require litigation. It also helps close the informational gap between a buyer and seller, which could give the buyer more leverage in negotiating a purchase agreement. For example, through due diligence, a buyer can determine the true value of a target through its financials and confirm that key assets are operational and compliant with laws and regulations. 

But due diligence has its limits. It can be expensive. Depending on the resources available or the magnitude of the deal, a buyer may not be able to afford a team of lawyers to conduct legal due diligence, engineers to ensure the regulatory compliance of the assets, or auditors to review the financials. Moreover, even in a world where the buyer has unlimited resources, a buyer still cannot expect to discover everything there is to know about a target.

Benefits of strong representations and warranties

To overcome these limitations, a buyer should pair due diligence with strong representations and warranties that adequately protect what is important to the buyer. 

Representations and warranties are commonly used contract provisions that bind a party, often a seller, to a statement of fact and give the party to whom they are made recourse if some aspect of the target is not as it was held out to be. Although there are technical differences between representations and warranties, they are often used synonymously. 

Representations and warranties can provide a buyer with significant leverage should issues arise post-acquisition. Following the close of the transaction, if the buyer discovers the target was emptying its chemical waste into a nearby stream illegally, and the seller warranted that the target did not, a seller is unlikely to feel very good about its chances in a court of law. The seller will be more likely to settle out-of-court, avoiding litigation, and, even if litigation is required, it will be faster and less expensive if the seller is bound by a contract provision with no viable defense. Representations and warranties are therefore powerful tools in an acquisition.

Unfortunately, purchase agreements are not drafted in a vacuum. Lawyers for the seller will be doing everything they can to narrow and minimize the contractual provisions that create risk for their clients. Conversely, a buyer will want broad representations and warranties that can cover not only situations the buyer can foresee but also those it cannot. Additionally, a buyer will want tailored representations and warranties ensuring that the most important aspects of the deal, such as a key asset, are covered. 


With this in mind, a buyer should prioritize what is important and use a combination of due diligence and representations and warranties to ensure it is protected. If a buyer feels it can perform adequate due diligence on an aspect of the target, it may not prioritize a representation or warranty related to that aspect. However, if, for example, the target is a multi-national company with locations or property overseas, due diligence may not be feasible, and strong representations and warranties will be required. 

By learning about a company on the front-end of a deal through due diligence, issues that arise can be negotiated and addressed in the purchase agreement rather than in post-acquisition litigation. When due diligence is too expensive or otherwise inadequate, strong representations and warranties can encourage disclosure and possibly deter post-acquisition litigation or, if litigation is required, provide a quick path to victory. Strategic due diligence and contract drafting may take time, effort and money but can be worth it when compared to the alternative of miring a buyer in multi-year litigation that drains the profits from a deal.

© Polsinelli PC, Polsinelli LLP in CaliforniaNational Law Review, Volume VIII, Number 88

About this Author

Alexander Bartko, Polsinelli Law Firm, Real Estate and Business Litigation Attorney

Alex Bartko takes pride in bringing an assertive and strategic brand of representation to clients as a member of Polsinelli’s litigation team. His practice focuses on litigating real estate, business tort, contract, and partnership disputes, which often present multi-faceted problems that require creativity and persistence. 

Stacy Carpenter, Polsinelli Law Firm, Litigation Attorney

Stacy Carpenter is a resolution-focused trial attorney who understands the importance of identifying and employing a litigation strategy that is outcome-driven, effective, and aligned with her clients’ business objectives. As Chair of Polsinelli’s Commercial Litigation practice, she combines her strong advocacy skills and her strategic analysis to achieve positive and timely outcomes both in and out of the courtroom. Stacy works closely with clients to understand their business, build relationships, and manage their legal needs. She is active in the Colorado legal...