Organization, Qualification, and Authority of Seller
What is the Organization, Qualification, and Authority of Seller section? In this section, the Seller provides information regarding its legal ability to conduct the Business and enter into the Agreement. It is part of the Representations and Warranties of the Seller section.
The Representations and Warranties of Seller portion of the Agreement is used to save the Buyer time and money. Rather than require the Buyer to go through third parties to find certain information, the Seller provides the information and must reimburse the Buyer for any Losses it suffers if the information is false or misleading.
The Middle Ground: In this collection of clauses, the Seller represents that: (1) it is a validly organized business, (2) it is qualified to do business in the states where it operates and where the Purchased Assets are held, (3) it has the power and authority to enter into the Agreement and abide by its terms, and (4) it has taken or will take the necessary corporate action to perform its obligations under the Agreement.
Purpose: Taken together, these clauses have a significant impact on the Buyer’s level of risk and the Seller’s legal ability to live up to its end of the bargain. The Agreement is typically made between the Buyer’s company and the Seller’s company, and the assets being transferred are assets owned by the Seller’s company. Therefore, whether the Seller can fulfill its obligations under the Agreement hinges on its status as a validly organized entity that has the authority to transfer the assets. When the Seller makes representations to that effect, the risk of those representations being false shifts to the Seller. Furthermore, by representing that it is qualified to do business in the jurisdictions where it operates, the Seller is shielding the Buyer from potential liability and penalties for any unlicensed operations (in jurisdictions where a license is required).
Buyer Preference: The Buyer generally wants these representations to be drafted broadly, without any qualifiers relating to Material Adverse Effect and without limiting the jurisdictions to which the representations apply. However, the Buyer will be asked to make essentially the same representation as part of its representations and warranties, so it should be willing to include the same language used here.
Seller Preference: The Seller will want to limit its qualification representation to jurisdictions where failure to be licensed or qualified will have a Material Adverse Effect. It may also want to limit the qualification representation to a list of jurisdictions provided in the Disclosure Schedules, rather than in all jurisdictions where it operates or where the Purchased Assets are held. To limit the risk posed by third parties, a Seller can seek to include an exception in its authority representation that allows it to get out of the Agreement if equity principles or creditors’ rights laws deem the Agreement to be unenforceable (e.g. because it violates fraudulent conveyance laws).
Differences in a Stock Sale Transaction Structure: None.
