Compliance representations (reps) and warranties, found in contracts with third parties as well as in M&A, can take on heightened importance depending on a medley of factors. The size of the deal, the bargaining power of the parties and the enforcement priorities of the current administration can all impact which reps and warranties are included in a contract, but a perhaps overlooked factor is the skill and knowledge of the attorneys involved in negotiations.
Standardized language in compliance reps and warranties can be sufficient for lower risk and lower cost arrangements but the line between a deal requiring boilerplate versus a bespoke approach is not always clear.
“Whether compliance representations and warranties are heavily negotiated or mere boilerplate often depends on the complexity of the transaction and the money at stake, as well as on various risk factors,” said Daniel Bernstein, counsel at Arnold & Porter.
This second article in a four-part series on compliance reps and warranties in the Trump 2.0 era and beyond addresses negotiation strategies. Part one defined key terms and addressed why these contract clauses still matter, how they become outdated and what they reveal about corporate culture. Part three will address verification and enforcement of reps and warranties, and part four will explore how compliance reps and warranties are evolving as risks shift.
See our three-part series “Rethinking Click-Through Training”: The Pluses and Minuses (Feb. 26, 2025), Maximize Effectiveness With Customization (Apr. 9, 2025), and Integration Into a Comprehensive Training Program (May 7, 2025).
Boilerplate Versus Bespoke
Compliance representations generally address past and present behavior. For instance, a contracting party might represent that it is not and has not been the subject of an investigation or enforcement proceeding involving an alleged violation of an anti-bribery law. Warranties, in turn, may be more future-focused while still including present-tense statements such as a warrant of compliance with applicable anti-bribery laws.
When it comes to drafting, there tends not to be a lot of hair-splitting between the two. “Representations and warranties do tend to be conflated with respect to compliance,” said Cynthia Cole, a partner at Alston & Bird.
Reps and warranty language will frequently be included in the same clause and specify that a party “represents and warrants” compliance, observed Adam Goldberg, a partner at Pillsbury.
Some agreements use standardized language or boilerplate for compliance reps and warranties. “A lot of companies, big and small, do have standard compliance representations and warranties that they routinely use,” Bernstein said.
From a budgetary perspective, it makes sense that organizations would latch on to boilerplate language that can be inserted easily into multiple contracts. “Not every transaction merits a lot of negotiation as to the content of representations and warranties,” Bernstein noted.
Additionally, boilerplate can be edited as needed. “Good companies have fairly solid representations and warranties that sometimes have to be tweaked for certain situations,” said Martin Weinstein, a partner at Cadwalader.
Determining Scope
Whether standard language or tailored provisions are used, the breadth of these clauses should be given some thought. “There are advantages and disadvantages to really broad general compliance representations and warranties and to really specific ones,” Bernstein said.
Broad Language
More comprehensive reps and warranties can convey an important message about the importance of compliance. “On the plus side, a broad warranty that ‘thou shalt comply with applicable law’ communicates an expectation that a party will comply with applicable law or has in the past complied with applicable law, which can give some comfort,” Bernstein said. “Such a broad warranty can cover a lot of different areas,” he continued.
At the same time, an expansively crafted provision may be difficult to enforce “if it is purporting to cover anything and everything under the sun,” Bernstein observed. “It sometimes can be hard to prove damages from a breach, particularly a relatively minor or technical breach, of a very general rep and warranty about compliance with applicable law,” he explained. For instance, under a broadly written representation and warranty, “if some employee two years ago did not come to a complete stop at a stop sign while driving the company car, would that be a breach because there was a violation of a traffic law?” he hypothesized.
Narrow Language
More specific reps and warranties can provide greater clarity as to what the parties expect from one another. They also decrease ambiguity about what is covered by the contract and subject to redress, which can help avoid doubts about whether a particular law does or does not apply, Bernstein said.
However, more narrowly tailored reps and warranties can present their own set of legal headaches if, for instance, a clause conflicts with applicable law. This is less of an issue with regard to bribery and corruption, at least, because “most countries prohibit bribery, so there will not be a conflict with a local law there,” Weinstein said.
Still, drafters should be cognizant of local laws and avoid prospective conflicts with them by tailoring contract language accordingly. “In some cases, conflicts of law can be addressed by discussing specific conduct in a compliance provision (e.g., the provision of something of value to a government official) rather than specific laws (e.g., compliance with the FCPA in a country where compliance with foreign laws may be prohibited),” Goldberg explained.
Applicability limiters such as terms like “as applicable” and “to the greatest extent permitted by applicable law” can also be effective, Goldberg suggested.
As a practical matter, budgetary concerns can also impact the breadth, depth and original language inserted into compliance reps and warranties. “There are costs associated with negotiating more specific representations and warranties,” Bernstein noted. Those transactions that “present particular risks . . . may make more bespoke representations and warranties appropriate,” he said.
See our two-part series “Projects Ventured, Risks Gained”: Anti-Corruption Concerns in Joint Ventures (Oct. 11, 2023), and Joint Venture Risks and How to Mitigate Them (Oct. 25, 2023).
Negotiation Strategies and Tactics
It is helpful to think of negotiation of compliance reps and warranties as a means of risk allocation. “If an investment or acquisition touches on high-risk jurisdictions, compliance terms are generally negotiated more heavily,” Goldberg observed.
Tailoring Clauses to Due Diligence Findings
The challenge for lawyers working on a deal can be to know when to push harder and when to ease up. “Whether representations and warranties are negotiated or boilerplate primarily depends on the risk profile of an M&A target or a third party,” observed F. Joseph Warin, a partner at Gibson Dunn. To that end, “there is a significant relationship between the negotiation of representations and warranties and the due diligence process,” he noted.
“A specific compliance subject may require content-specific representations and warranties based on a variety of factors, including the results of due diligence, industry, regulatory framework or geography,” Oleh Vretsona, a partner at Gibson Dunn, told the Anti-Corruption Report. Due diligence helps a contracting party understand the relevant risks associated with a business partner and tailor contract language to those risks. For example, if a counterparty has a low risk profile, a company may be more comfortable with boilerplate provisions or even with a reduction in the scope of reps and warranties, such as reduced lookback periods. If, however, a seller or a third party has a higher risk profile, “a prospective buyer or customer will likely be less flexible in negotiating both the type and scope of provisions to be included in the deal,” he said.
Asking for More but Agreeing to Less
Another approach to the content of compliance reps and warranties is to begin expansively. “A company that wants to enforce representations and warranties typically will draft them as broadly as possible to encompass future iterations of the law,” Cole said.
Attempting to get the other side to narrow a broadly scoped clause might involve a more nuanced approach. It is, after all, unlikely that an entity will assert that it does not agree to comply with applicable laws. “Companies that do push back on overly broad compliance representations and warranties typically do so by attempting to reduce the scope of the provisions,” Warin said. For instance, they might “attempt to limit the types of laws (e.g., anti-corruption, data privacy) covered by the provisions, reduce the lookback period, or limit audit rights and requirements related to document retention and compliance programs,” he explained.
Bargaining Power and Leverage
How much sway there will be with respect to the content of compliance reps and warranties depends on how much each side needs the deal. “Sometimes companies that have no leverage accept everything because they do not really have a choice,” Cole said.
“The party that wants or needs the deal more is generally going to make more concessions,” Goldberg said, sounding a similar note.
Nevertheless, third parties or M&A targets might push back against overly broad compliance reps and warranties. “They often want language that requires compliance only with the local laws of their jurisdiction, which do not reference U.S. or E.U. laws that might conflict with local laws, and where breach is triggered only in the event of an adjudicated finding of a legal violation, i.e., where a court finds that corrupt activities or export controls violations have occurred,” Goldberg said.
Still, “third parties usually do not push back on representations and warranties as strongly as M&A targets because of the power dynamic that often exists in third-party cases,” Vretsona said. Unless the third party has similar market share or otherwise has comparable bargaining power, it will often accept broad provisions. Additionally, “customers often have alternatives and can walk away from an engagement if the third party is unwilling to accept reasonable compliance representations and warranties,” he continued.
M&A targets, however, “often push back on provisions they view as unreasonable or overly broad, particularly if those provisions do not adequately reflect the target’s risk profile or due diligence results,” Warin said. There can also be “more openness to negotiating appropriate compliance representations and warranties in order to help reach a deal,” he noted.
Avoiding Deal Breakers
Compliance reps and warranties tend not to be “deal breakers,” even if they are heavily negotiated, Cole said, but they can fundamentally alter the nature of the transaction or business relationship.
Workarounds
If a party is not in a position to make the standard reps and warranties, the parties may need to renegotiate the price of the transaction or change the nature of the deal, Cole explained. “If originally the deal was structured as an acquisition, it may be changed to an investment,” she suggested.
Should the content of compliance reps and warranties in a deal become a sticking point, “there are several workarounds companies may pursue to reach agreement,” Warin said. For example, disclosure schedules might be used to set forth known issues identified through due diligence that can serve as exceptions to a particular rep or warranty. Language with regard to knowledge, including whose knowledge will be imputed to the representing party, or materiality requirements can be added, as well. The parties can also reduce the applicable lookback periods, though “targets often attempt to reduce lookback periods and buyers insist on adhering to periods consistent with the relevant statutes of limitations,” he noted. “Of course, buyers or customers need to consider the risk profile of the other entity and the level of risk they are willing to accept under the proposed terms when deciding whether to offer or accept these limitations,” he cautioned.
While options for limiting the scope of compliance reps and warranties “can help facilitate dealmaking,” Vretsona observed, “companies should be strategic in their negotiations to ensure that any qualifications align with actual risks and that they are adequately protected against liability for violations of laws that present the most significant compliance risks to them,” he suggested.
Red Flags
What might have started as the slight markup of some standardized verbiage in compliance reps and warranties can take on much greater significance if issues arise in the negotiation process. Indeed, some issues that come up while negotiating reps and warranties might be red flags that should make parties pause before moving forward with a transaction.
Even though “parties rarely walk away from a deal because of compliance terms,” Goldberg said, concerns are raised “when a counterparty refuses to represent and warrant even to standard compliance terms that should be easy for a compliant entity to make,” he continued.
Compliance reps and warranties can be deal breakers when “something about the target is especially high-risk” and if “non-compliant activities would impact the value of the investment,” Goldberg said.
“Companies have walked away from a deal because they just did not get the compliance information they felt they needed or the contractual protection they sought,” Bernstein said. For example, in a transaction on which he worked, the potential acquirer “had some concerns about the target company’s compliance in a foreign country,” he recounted, based on incidents that came to light during due diligence. The acquirer “just could not get enough information about these incidents” and ultimately “did not feel like they would have enough protection to go forward with the transaction,” he explained.
Lawyers experiencing pushback over compliance reps and warranties in a transaction might let opposing counsel know what message they are sending by not acceding to proposed terms. “Much ground can often be covered by explaining to the counterparty why certain language is required based on applicable law, why the terms are reasonable, and why the refusal to agree even to reasonable terms suggests that they might be hiding significant legal violations that would impact the value of the deal if known,” Goldberg suggested. In the end, “short of a good negotiation, a company will simply have to weigh the potential for legal and reputational risks against the commercial benefits of the deal,” he said.
Specificity Regarding Termination
For those rare occasions when deals do not close because of sticking points with respect to compliance reps and warranties and one party wants to walk away, it can be helpful to negotiate termination clauses with reps and warranties.
In a number of transactions in which Weinstein was involved in the last year, termination triggers were a significant part of the reps and warranties negotiations. The parties involved considered whether a termination could be triggered by a good-faith belief in a violation or whether there must be a conviction or just a charge, he explained. On one side, “the acquiring party, or the party on the buying side, will want to terminate the arrangement based on their own reasonable belief that a violation has occurred,” he said. On the other side, “the party being acquired, or the party on the selling side, will want a termination clause that is much stricter that says the arrangement can only be terminated if there is a conviction,” he observed.
See our three-part series on managing corruption risk in portfolio companies: “Understanding Liability” (Apr. 3, 2019), “Assessment, Diligence and Walking Away” (Apr. 17, 2019), and “Monitoring and Oversight” (May 1, 2019).