In transactions involving the acquisition of equity interests or investments, one of the most prominent– and most negotiated – clauses is that of representations and warranties. This provision serves to reduce the asymmetry of information between buyer and seller and reinforce the seller’s responsibility regarding the target company’s situation prior to the closing of the transaction.
Representations and warranties consist of statements — primarily by the seller — about the accuracy, integrity, and completeness of the information on the target company and facts that occurred during the period in which it was part of its corporate structure. Among the most sensitive issues are: ownership of the equity interest, free and clear of any encumbrances; compliance with applicable law, from labor standards to anti-corruption rules; the existence of administrative or judicial proceedings; the accuracy of the financial statements; and the ownership and condition of the assets, including real estate, equipment, and intellectual property.
The buyer may also provide representations, such as due incorporation and valid existence (if a legal entity), authority to enter into the agreement, absence of legal or contractual violations, and financial capacity to meet agreed payment obligations.
These statements enable the buyer to identify risks not revealed during due diligence, while the seller formalizes certain facts — often assuming obligations to remedy issues before or after closing. In addition to ensuring equal access to information, the representations and warranties clause serves as a mechanism to hold seller directly accountable for any omissions or inaccuracies identified after closing, regardless of the occurrence of immediate damage to the buyer or the target company. Breaches may trigger penalties or contractual indemnification mechanisms, which typically cover not only full compensation for losses but also reimbursement of costs incurred to mitigate hidden liabilities.
For foreign investors, the robustness of these representations is crucial due to challenges inherent to the Brazilian market: tax complexity, constantly evolving case law and multiple instances of sectoral regulation. Careful wording reduces uncertainty, facilitates financial modeling, and lowers the cost of capital. At the same time, the seller — aware of the scope of the required representations — will seek to mitigate risks through full disclosure (disclosure schedules) and specific carve-outs, preserving the attractiveness of the deal without compromising its post-closing position. The result is a negotiation process that demands both balance and precision.
Experience shows that negotiating these provisions requires methodological care: legal and accounting due diligence must be in-depth; the representations must be adapted to the regulatory specificities of the relevant sector; and the contract must be drafted to reflect international standards, where appropriate and applicable, while maintaining compliance with Brazilian legal requirements.
In summary, representations and warranties in M&A transactions are indispensable instruments to sustain transparency, preserve investment value, and minimize future litigation. Careful drafting — supported by comprehensive due diligence, balanced negotiation, and specialized technical advice — can be a significant competitive advantage, enabling both domestic and international investors to pursue opportunities in the Brazilian market with greater predictability, legal certainty, and commercial efficiency.