R&W and Indemnities in M&A transactions

Julio Menchaca Vite, Head of the M&A area. AGM Abogados



After performing a due diligence, and detecting the potential contingencies regarding the target company, we must define the seller’s liability framework in the event that such contingencies or other unknown ones materialise.


Likewise, the same must be made regarding the buyer, although this article focuses on the seller’s side.


In the sale contract, this is established through representations and warranties (hereinafter, “R&W“), as well as specific damages or “Indemnities“, which we will analyse below:


R&W – Representations and Warranties


R&W are statements of fact about the target company situation whereby the seller is liable for their truthfulness and accuracy.


They are usually unidentified potential risks (those identified will normally be regulated through Indemnities, which will be discussed later), to which a general liability framework applies.


R&W cover, inter alia, the following matters:


  • Legal capacity and powers.
  • The equity units or shares addressed by the sale.
  • Corporate matters.
  • Employment and social security obligations.
  • Tax obligations.
  • Financial statements and equity situation.
  • Contracts and insurance.
  • Administrative licences, authorisations and permits.
  • Industrial and intellectual property.
  • Personal data protection.


The R&W liability framework regulates matters such as:


  • Time limits: since the seller cannot be liable indefinitely, such limits are usually between 12 and 24 months, with the exception of employment, tax and administrative liabilities, for which a period equal to the legal statute of limitations is set.


  • Quantitative limits: one or more quantitative limits may be set, the most common of which are set out below:


  • Cap: the maximum amount for which the seller will be liable, usually linked to the price.
  • Minimis: the minimum amount for a damage to be indemnifiable by the seller.
  • Deductible or basket: the amount above which the seller is liable for compensable damage, with the possibility of establishing that the seller is liable from the first euro, or for the excess of the deductible.


Similarly, it is common to exclude from the limitations cases of wilful intent or fraud and those related to the capacity to enter into a contract, the ownership of the shares, and the existence of the company.


On the other hand, a claims procedure is usually defined if a contingency materialises, distinguishing whether it is a third-party claim or a claim between the parties, with a number of specific steps to follow and specific rules ranging from how to send notifications or which party will be in charge of the defence, to the mechanism for quantifying the damage, or the form and timing of the compensation payment.




Indemnities refer to known and identified risks for which specific remedies are envisaged, so the general R&W framework for the time and quantitative limits and the claims procedure does not apply to them.


For example, if the buyer detects a tax contingency due to an undue deduction, it can be established that, in the event that this is materialised through an inspection by the tax authorities, the seller will have to pay the full amount of the damage (principal, fine and surcharges) immediately after the corresponding decision becomes final.


As can be seen, the objective of both the R&W and Indemnities is to establish and distribute the risks entailed in any M&A transaction since their inclusion is essential in any contract for the purchase and sale of equity units/shares, businesses or assets, and their content is very important due to their impact if the contingencies materialise. Therefore, their structure must be carefully drafted and their wording must not lead to confusion which may generate conflict afterwards.



If you have any doubts or require further information, please contact us.