The financial statements clause is one of the most important seller’s representations. The clause states that seller has: (a) supplied, or provided access to, its financial statements, (b) declared the method of preparation, and (c) represented as to their accuracy
The clause may be variously combined with SEC reports, books and records, statements of accounts receivable and inventories, disclosure of debt and credit facilities, and compliance procedures. A proposed organizing framework is provided in the Representations and Warranties section of ContractStandards.
Note: For public companies, the financial statements provision will typically refer to SEC reports rather than attach the statements as exhibits.
“Each of the consolidated financial statements (including, in each case, any notes thereto) contained in the SEC Reports was prepared in accordance with United States generally accepted accounting principles (“GAAP”) applied on a consistent basis throughout the periods indicated.”
Additional Clause Elements
4. Auditor Reports
The Independent auditor’s report with respect the financial statements do not contain any reservation or supplementary information and such auditor’s report(s) certify, and will certify, as applicable such accounts unconditionally and without qualifications.
The Disclosure Schedule sets forth as of [DATE], financial projections [for the period] that have been prepared in good faith based on assumptions believed to be reasonable at the time of preparation thereof and there are no statements or conclusions in any of the projections which are based upon or include information known to be misleading in any material respect or which fail to take into account material information regarding the matters reported therein. As of [DATE], the [PARTY] believed that the projections are reasonable and attainable; it being recognized, however, that projections as to future events are not viewed as facts and that the actual results during the period or periods covered by the projections are likely to differ from the projected results and the differences could be material.
The seller’s representation regarding financial statements is one of the most important disclosures. Moreover, a significant number of the seller’s representations relate to the financial condition of the seller’s business, although they are often spread around the representations section and not organized in a logical sequence.
“The financial statement representation is usually not the subject of intense negotiation. Most frequently negotiated are the kind of financial statements to be included in the representation (balance sheets, operating statements, statements of changes in financial position, and stockholders’ equity), the periods to be covered by such financial statements, and whether such statements have been audited. Where Acquiror is already aware that Target’s accounting procedures have not been in strict accordance with GAAP, it may agree to "carve out" exceptions to the standard representation. This, however, diminishes the reliability of the financial statements. Determining whether Acquiror is entitled to receive certain financial statements of Target or whether it should accept statements not prepared in accordance with GAAP depends on what information about Target was provided to Acquiror prior to striking the deal, and what Acquiror honestly relied on when it made its decision to purchase Target.” (Google Books)
Public Companies. In case of the acquisition of a public company, the financial reports will be reference to SEC filings. In the circumstance, the buyer should include a provision representing that such filings are true and not misleading.
Private Companies. In the case of the acquisition of a private company, the buyer may require a representation as to financial projections. When included, a financial projections provision will likely be highly negotiated and customized.
In finance agreements, further disclosure financial condition is typically required, including itemization of all credit facilities and debt to asset ratios. Finance agreements and acquisition agreements for the purchase of a start-up company (with limited financial history) may also require provision of financial projections.