In Turkish M&A transactions, representations and warranties (R&W) are one of the most negotiated parts of the Share Purchase Agreement (SPA). Buyers rely on them to protect against hidden risks—tax and social security liabilities, undisclosed litigation, contract breaches, IP ownership issues, regulatory non-compliance, and off-balance-sheet obligations. Sellers, on the other hand, want certainty: clear limits, short survival periods, and predictable exposure.
This SEO-focused guide explains representations and warranties in Turkish M&A, how disclosure schedules work, and how parties typically structure liability limits (cap, basket, de minimis, survival, knowledge qualifiers) to make deals bankable and enforceable.
1) What Are Representations and Warranties in an SPA?
Representations and warranties are contractual statements made by the seller (and sometimes the target) about:
- the company’s legal existence and authority,
- ownership and title to shares,
- financial statements and accounting quality,
- taxes and social security compliance,
- employment and benefits,
- material contracts and customer/supplier relationships,
- litigation, investigations, and regulatory compliance,
- assets, IP, data protection, and permits.
If a statement is untrue, the buyer may have a claim for damages or indemnification—subject to the liability mechanics agreed in the SPA.
Practical point: R&W is how the buyer converts “information risk” into “contractual recovery rights.”
2) Why R&W Matters Especially in Turkey
In practice, R&W becomes even more important in Turkey because:
- SMEs may have weaker record discipline,
- tax/SGK risks can arise years later,
- related-party dealings can be informal,
- contract and authority documentation may be incomplete,
- property and asset registers (including pledges) require careful verification.
Even a strong due diligence cannot catch everything—R&W fills the gaps and allocates risk.
3) Core R&W Categories Buyers Should Prioritize
A) Corporate and Share Title
- valid incorporation and good standing
- seller’s valid title to shares
- no share pledges, liens, or third-party rights
- authority and proper approvals for the sale
B) Financial Statements and Undisclosed Liabilities
- financial statements prepared consistently
- no off-balance-sheet obligations
- no unusual transactions outside ordinary course
- no hidden guarantees or commitments
C) Tax and Social Security (SGK)
- taxes filed and paid properly
- no ongoing audits or undisclosed assessments
- SGK compliance and payroll accuracy
- no unpaid severance liabilities not reflected in records
D) Material Contracts
- list of key contracts is complete
- no defaults and no termination triggers triggered by the sale
- change-of-control consents are obtained or disclosed
E) Litigation and Regulatory
- complete disclosure of disputes and investigations
- permits and licenses are valid
- no ongoing regulatory breaches
F) Employment
- accurate employee list and terms
- no hidden benefits or side agreements
- proper classification and payroll compliance
- compliance with termination and severance rules
G) IP and Data Protection
- ownership of key software/IP is clear
- no third-party infringement claims
- data protection compliance (where relevant)
4) Disclosure Schedules: The “Exception List” That Decides Real Liability
A disclosure schedule is where the seller lists exceptions to the warranties. Example:
- “No litigation” warranty → disclosure schedule lists the existing lawsuits.
- “No contract default” warranty → schedule lists contracts with known breaches.
Why it matters:
If something is properly disclosed, the buyer usually cannot claim it as a warranty breach later (depending on how the SPA is drafted).
Best practices for disclosure schedules
- tie each disclosure item to the relevant warranty section number,
- include documents or references (case number, contract date, parties),
- avoid vague “general disclosures,”
- disclose both the issue and its potential financial impact where possible.
Buyer tip: Make “proper disclosure” a defined standard. If disclosure is incomplete, treat it as not disclosed.
5) Liability Limits: Cap, Basket, and De Minimis Explained
A) Cap (Maximum Seller Liability)
The cap limits total seller exposure. It can be:
- a % of purchase price, or
- different caps for different claim types.
Common structure:
- general warranties cap: lower (e.g., 10–30% of price)
- fundamental warranties cap: higher (sometimes up to full price)
- tax specific indemnity: separate cap or separate escrow bucket
B) Basket (Threshold Before Claims Are Payable)
Basket means the buyer bears small losses up to a threshold. It can be:
- deductible basket (only amounts above basket are paid), or
- tipping basket (once threshold is exceeded, full amount becomes payable).
C) De Minimis (Ignore Tiny Claims)
De minimis sets a minimum claim size (per claim) so parties don’t fight over minor amounts.
Practical takeaway: Cap, basket, and de minimis stop “death by a thousand small claims” and help close deals faster.
6) Survival Periods: How Long Warranties Last
Survival defines how long after closing the buyer can bring claims.
Typical approach:
- general warranties: 12–24 months
- tax warranties: longer, aligned with tax risk horizon
- title/authority (“fundamental”) warranties: longest
Seller goal: shorter survival.
Buyer goal: survival aligned with real risk discovery timelines.
7) Knowledge Qualifiers and Materiality Scrapes
Knowledge qualifiers
A warranty may be limited to what the seller “knew” (actual knowledge) or “should have known” (constructive knowledge). This can be heavily negotiated.
Buyer preference: narrow knowledge qualifiers or define knowledge group strictly.
Seller preference: knowledge-based warranties to limit strict liability.
Materiality scrape
A “scrape” may ignore materiality qualifiers for claim calculation, preventing sellers from hiding behind subjective materiality language.
8) Claim Procedure: How Buyers Must Notify and Prove Breaches
A good SPA sets a clear claim process:
- notice requirements (what must be included),
- time window to notify after discovery,
- seller’s right to respond and defend,
- cooperation rules and access to documents,
- control of third-party claims (who leads the defense).
Tip: If the process is unclear, disputes become procedural wars instead of substance.
9) Specific Indemnities: The Cleanest Way to Handle Known Risks
If due diligence reveals a known risk (e.g., ongoing tax audit, specific lawsuit), parties often agree on a specific indemnity:
- defined risk,
- defined cap,
- defined duration,
- defined recovery method (often escrow/holdback bucket).
Specific indemnities are often easier than trying to stretch general warranties to cover everything.
10) How Escrow/Holdback Connects to R&W
R&W gives the buyer a legal claim. Escrow/holdback gives the buyer a collection mechanism.
Best practice:
- align escrow amount with key risk categories (tax, litigation, general warranties),
- match escrow duration to survival periods,
- define partial release rules and disputed-amount handling.
Without escrow, a buyer may “win a claim” but struggle to collect from an exiting seller.
FAQ
Are representations and warranties enforceable in Turkey?
Yes, if drafted clearly in the SPA. Practical enforceability improves with clean claim procedures, defined disclosure standards, and escrow/holdback security.
What is the most important part: warranties or disclosure schedules?
Both. Warranties allocate risk; disclosure schedules define exceptions. Many real deal outcomes are decided in the disclosure schedules.
Should buyers accept “knowledge-qualified” warranties?
It depends. Buyers often push for strict warranties on fundamental issues (title, taxes, compliance) and may accept knowledge qualifiers on less critical areas.
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