Introduction

Reps and Warranties are designed to protect buyers against undisclosed liabilities after closing. But what happens if the seller cannot honour them? Solvency post-closing is a critical issue that is often underestimated. A warranty without enforceability is just words on paper. If you are planning an acquisition, you need more than promises, you need mechanisms that make those promises executable.

What are reps and warranties?

“Reps and warranties” stands for “representations and warranties”, which are core clauses in M&A share purchase agreements.

- Representations: Statements of fact about the business as of signing (e.g., “the company owns all its intellectual property”).

- Warranties: Promises that certain facts are true, with remedies if they are not.

- Together, they allocate risk by allowing the buyer to claim compensation if a statement proves false after closing.

- Reps and warranties can be mutual (both buyer and seller give them) or one‑sided (usually seller to buyer).

- They are often heavily negotiated: scope, duration, caps, and carve‑outs are tailored to the deal.

- Enforcement depends on both the legal language and the financial strength (solvency) of the party giving them

What is a warranty?

- A contractual promise that a specific statement about a company or asset is true at a certain point in time.

- Used in M&A and funding agreements to allocate risk between buyer and seller.

- Can cover a wide range of topics: financial statements, compliance, ownership, absence of litigation, product quality, etc.

- If a warranty proves untrue, the party giving it may be liable for damages or required to compensate the other party.

- Warranties can be general (covering the whole business) or specific (targeting particular risks or issues).

- Often subject to limitations: time periods, financial caps, materiality thresholds, and knowledge qualifiers.

- Serve as a tool for due diligence and post-closing protection for buyers.

What is solvency?

- The ability of a company or individual to meet their financial obligations as they come due.

- In M&A, solvency of the seller is crucial: a warranty is only valuable if the seller can actually pay compensation if a claim arises.

- Solvency is often tested or warranted in the agreement (e.g., “the seller is not insolvent or subject to bankruptcy proceedings”).

- Mechanisms to secure solvency include escrow accounts, deferred payments, bank guarantees, or warranty & indemnity insurance.

- Lack of solvency can render even the strongest warranty clause unenforceable in practice.

Why solvency matters

In any M&A deal, the risk does not disappear at signing. Tax claims, social security issues, environmental liabilities or litigation can surface months later. Without financial security, even the strongest warranty clause becomes meaningless. That is why every well-negotiated SPA (Share Purchase Agreement) includes not just warranties, but the tools to enforce them.

Key mechanisms to secure your deal

Here are the most effective ways to ensure warranties are backed by real solvency:

- Escrow Account: Part of the purchase price is held for a set period to cover potential claims.

- Deferred Payment: Vendor loans, earn-outs or staged payments act as leverage for indemnification.

- Bank Guarantee or Letter of Credit: Provides direct financial security to the buyer.

- W&I Insurance: Transfers risk to a specialised insurer. In Belgium, availability and terms for W&I insurance in SME deals depend on enterprise size, completeness of due diligence, and insurer appetite.

Choosing the right mix

The right combination depends on:

- The seller’s financial profile

- Size and structure of the deal

- Exposure amount and duration

- Legal and regulatory constraints

There is no one-size-fits-all solution. Each mechanism has its cost, complexity and impact on negotiations. The goal is simple: make sure every euro of protection is real, not theoretical.

Dups’ approach

At dups, we structure deals to secure every clause and every euro. We do not just draft agreements, we negotiate mechanisms that protect you when it matters most. Our dual expertise in law and finance means we anticipate risks, integrate safeguards and deliver clarity under pressure. For entrepreneurs acquiring or exiting, we are your sparring partner from strategy to closing.

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