Financial Statements


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.

Standard Clause

  1. Financial Statements

    1. Information Supplied

      The Disclosure Schedule sets forth [accurate and complete] audited consolidated financial statements [for the period] and unaudited consolidated interim financial statements [for the period].

    2. Preparation

      The Financial Statements are prepared [in accordance with GAAP applied] on a consistent basis for all periods presented [except as may be indicated in the notes to such financial statements].

    3. Accuracy

      1. The Financial Statements [accurately set out / fairly present, in all material respects] the financial condition and operating results as of the dates, and for the periods, indicated therein, subject to normal year-end audit adjustments.

      2. [The Financial Statements do not and will not contain any untrue statement of a Material fact or omit to state a Material fact required to be stated therein or necessary in order to make the statements made therein, and in light of the circumstances under which they were made, were not misleading.]

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."

    Stock Purchase Agreement. January 27, 2009.

Optional Additional Clause Elements

d. 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.

e. Projections. 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.

Discussion

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."

See, Stanley Foster Reed et al., The Art of M&A, Fourth Edition: A Merger Acquisition Buyout Guide 531 (4th ed. 2007)

Acquisition Agreements. The Financial Statements clause generally requires different information in an Acquisition Agreement depending on the nature of the company being acquired.

  • 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.

Finance Agreements. 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.