The Legal Nature of Representations and Warranties in Share Purchase Agreements

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In a share purchase transaction of stock corporations, the assets, management or actives and passives of the company are not directly transferred, instead, the partnership rights over the company is transferred. The legal nature of the share purchase transaction is not transfer of an asset, it is a transfer of a right.

The determination of the necessary legal transactions for share purchase depends on ascertaining the nature of the partnership, the type of shares, and whether share transfer is restricted or not.

For instance, if a private company has bearer shares, Article 489 of the Turkish Commercial Code (“TCC”) states that “Transfer of bearer share certificates inure to company and third parties only with the notification to be made to the Central Securities Depository by the transferee via the devolution of possession.

Likewise, if a private company has registered shares, pursuant to Article 490 of the TCC, the transfer shall be completed with the endorsement of the share certificates and the devolution of possession to the transferee.

Thence, the share purchase is completed by full endorsement of the share certificate and devolution of possession from the rightful transferor to the transferee with the purpose to transfer ownership. As endorsement is an independent declaration of will, transfer of registered shares does not require a valid promissory transaction.[1] The act of disposal, which consists of endorsement and transfer of possession, is necessary and sufficient for purchase of a share certificate. There is no provision in the TCC concerning the promissory transaction for share purchase.

On the other hand, in practice, the consideration of share purchase is primarily about the transfer and purchase of an economic whole that the partnership provides, instead of dividends. Hence, besides the act of disposal that is explained above, execution of the promissory transaction will also be necessary. This promissory transaction is commonly encountered as a share purchase agreement.

The promissory transaction is the first step towards the act of disposal, and the act of disposal is the transaction that fulfils the obligation formed by the promissory transaction.[2] It is not possible for the transferee to acquire the ownership of the share certificate solely with the promissory transaction, as the transferor undertakes the obligation to transfer ownership of the shares to the transferee by the promissory transaction.[3] For the share purchase transaction to be valid, an execution act of disposal is necessary.

Representations and Warranties

Representations and warranties that are the subject of this article are encountered during the promissory transaction, i.e. during the share purchase agreement phase. Even though share purchase agreements evolve around shares, the rationale of such agreements is mostly about acquisition of the activities, assets, portfolio and/or the economic value of the company that the share represents. Thus, the qualifications of company activities, assets and other economic values as well as the qualifications of the share is significant for the transferee.[4]

As the provisions of the Law of Obligations related to sales contracts are not sufficient for share purchase agreements that consist of the transfer of economic values, assets, and company activities together with the transfer of shares, in practice, agreements with a lengthy list of detailed representations and warranties are executed.

The most common representations and warranties are created on the following subjects: corporate information, existence of the company, existence and validity of the shares, non-incumbent status of shares, administrative permissions, environmental law, material agreements, financial agreements and other financial documents, corporate books and records, financial records, balance sheet and profit loss calculations, information on properties (movable, immovable, intellectual property rights etc.), relations with clients and competitors/competition law, information on insurance, labor law and social security law, and disputes (cases, proceedings, administrative investigations and inspections, pretensions, notices, etc.).

The provisions that are used under the representations and warranties title in practice are separately held by the scholars as “qualification commitments” and “guarantees.”  Qualification commitments are employed to represent and warrant that the company whose shares are to be transferred carries certain qualifications and/or does not carry certain negative qualifications at the time the purchase agreement is concluded, i.e. when the promissory transaction is executed. In addition, these representations and warranties are reiterated with the act of disposal, when the endorsement and transfer of shares are completed.[5]

Moreover, guarantee declarations are employed to represent and warrant that certain positive events will occur or certain negative events will not occur.[6] The difference between qualification commitments and guarantees is crucial. In the absence of special covenants in the agreement, qualification commitments are subject to liability arising from defects, whereas guarantees form a separate obligation. Therefore, in case of breach of guarantee commitments, general provisions regarding breach of contract will apply instead of liability arising from defects.[7]

Qualification commitments can be about the current operational status, management, current assets and/or other economic values of the company whose shares are subject to transfer. Guarantee commitments will govern the issues apart from these. Qualification commitments can be related to an actual situation at a certain moment, whereas, representations and warranties related to the future shall be evaluated as guarantee commitments. Yet, qualification commitments concerning the future are not deemed invalid and are considered to be guarantee declarations.[8]

In some cases, the qualification commitments or guarantee commitments of the seller can be restricted with a seller’s best knowledge clause. If that is the case, the seller is only liable to the buyer for the occurrence of risks that are known or that can be known by the seller. In cases where such restriction is foreseen, there is a “subjective guarantee.” The guarantees that are provided independent from whether or not the risk is known by the seller are called “objective guarantees.[9]

Another significant issue exists regarding for which type of share purchases representations and warranties should be included in the share purchase agreements. Here, the issue that needs to be examined is whether the share purchase resulted in a change of dominance and control. In a share purchase where there is no change of control, the transferor should be liable for the qualification commitments and guarantees that are expressly represented and warranted under the share purchase agreement, i.e. with the promissory transaction, and the transferor shall not be liable for other subjects related to the activities of the company apart from these.[10] In addition, for share transfers that result in change of control, the sole subject of the transaction should not be considered as transfer of the ownership of the shares, rather, it should be considered as transfer of all of the elements that are part of whole activity and assets of the company.[11] In other words, it is the company itself that is transferred.

In cases where there is no change of control, as long as the transferor does not provide explicit representations and warranties through the promissory transaction, the transferor will only be liable for the existence of ownership rights over the shares that are subject to transfer.[12] However, if the share transfer results in change of control of the company, the transferor will be liable for the current activities, assets, and economic values of the target company, even though representations and warranties are not provided as to these matters. For share transfers that result in transfer of dominance of the target company, the transferor will be responsible for material legal defects and shortfalls in the assets.[13]

The most important factor in figuring out the scope of the qualification commitments and guarantees explained in this article, and the remedies to be applied in case of breach, is the due diligence process. The purchase of shares of a company includes divergent risks at each step. During the share purchase transaction, foreseeing the risk, then calculating the risk, and finally managing the risk and minimizing its consequences is the paramount strategy.[14] The instruments that outshine all others in this strategy are representations and warranties.

Calculating the risks spotted during the due diligence process is necessary to determine the structure and scope of the representations and warranties while they are drafted. Representations and warranties should be determined and structured with that strategy, after evaluating the likelihood of the risks identified and the magnitude of their impact.[15] Incompletely or poorly drafted representations and warranties will cause the buyer to not be able to cover damages in case of realization of the risk, while attempts to draft representations and warranties for a risk that is broader than necessary or that does not even exist will cause the negotiations to be prolonged and eventually result in waste of time and opportunity.


As explained above, for the accurate and efficient drafting of the representations and warranties, in the first step, careful structuring of the purchase transaction and identification and calculation of the risks via the due diligence process is crucial. Moreover, whether or not the share purchase results in a change of control is an aspect that directly affects the legal nature of the representations and warranties. In that sense, for transactions in which the activities of the company and the economic whole to be acquired together with the rights associated with the shares that are subject to transfer, a “Transaction” definition should be made and it should be stated that the qualification commitments and guarantees are not only provided for the shares, but provided for the whole transaction to prevent the discussions around the legal nature in the share purchase agreement.

Moreover, being aware of whether or not the drafted provision is a qualification commitment or a guarantee while drafting representations and warranties is of crucial importance for the legal consequences of the provision.

It should be emphasized that representations and warranties should be drafted in such a way that they correspond to the risks that are determined during due diligence. Demanding representations and warranties that do not pose any risk at all and including these in the agreement is not an achievement, rather, it is an element that negatively affects the quality and duration of the agreement and negotiations.

Representations and warranties that are drafted in line with the risks that are spotted and calculated as the outcome of an accurate and effective due diligence process facilitates delivery of the economic benefits that are expected from the transaction in a rapid and efficient way.

(Authored by Tuna Çolgar and first published by Erdem & Erdem on November 2021)

[1] Poroy, Reha/Tekinalp, Ünal/Çamoğlu, Ersin: Ortaklıklar Hukuku, Vol. II, Vedat Kitapçılık 2014, p. 126.

[2] Sevi, Ali Murat: Anonim Ortaklıkta Payın Devri, Seçkin Yayıncılık 2012, p. 151.

[3] Sevi, p. 152.

[4] Sevinç Atılganer, Melisa: “Liability from Representations and Warranties under Share Purchase Agreements”, Erdem&Erdem Newsletter, (Access date 26.10.2021).

[5] Buz, Vedat: “Ortaklık Paylarının Devrinde Ayıba Karşı Tekeffül Hükümlerinin Uygulanabilirliği Sorunu”, Banka ve Ticaret Hukuku Dergisi, Vol. 35 N. 3, 2019, p. 71-72.

[6] Buz, p. 72.

[7] Buz, p. 72.

[8] Buz, p. 73-74.

[9] Buz, p. 76-77.

[10] Paslı, Ali: Anonim Ortaklığın Devralınması, Vedat Kitapçılık 2009, p. 271.

[11] Paslı, p. 272.

[12] Paslı, p. 273.

[13] Poroy, Reha/Tekinalp, Ünal/Çamoğlu, Ersin: Ortaklıklar Hukuku, Vol. I, Vedat Kitapçılık 2014, p. 556.

[14] Esin, İsmail G.: Birleşme ve Devralmalar, On İki Levha Yayıncılık 2021, p. 117.

[15] Esin, p. 118.

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