What is a fundamental representation?
In M&A purchase agreements, a fundamental representation is a representation considered so essential to the transaction that breach is treated differently from breach of general/business representations — typically with longer survival period, no or minimal basket, and a higher (often purchase-price-level) cap. Fundamental reps go to the very foundation of what the buyer is buying.
Typical list of fundamental representations
- Organisation and good standing: seller and target entities validly exist.
- Authorisation and enforceability: the agreement has been properly authorised and is enforceable against seller.
- Capitalisation: share capital, options, warrants, convertibles, and ownership are as represented — fundamental because misrepresentation means buyer didn’t get what was bargained for.
- Title to shares/assets: seller actually owns what is being sold, free and clear of liens (or with disclosed liens only).
- Brokers and finders: no undisclosed advisor fees.
- Sometimes also: tax basics, environmental fundamentals, key permits, anti-corruption compliance.
Treatment in indemnification regime
- Survival: often longer than general reps (e.g., statute of limitations or even indefinite).
- Cap: typically purchase price (full) — not the 10-15% general cap.
- Basket: typically excluded from basket — first-dollar recovery.
- De minimis: may be excluded or significantly lower.
- R&W insurance: usually covers fundamentals up to the policy limit; excess goes back to seller.
Türk M&A pratiğinde
Türk işlem dokümanlarında “temel taahhüt” konsepti yaygın benimsenir; özellikle uluslararası yatırımcı katılımlı işlemlerde NVCA-uyumlu yapı standartlaşmıştır. TTK Madde 478 (imtiyazlı pay) ve esas sözleşme tabanlı sahiplik yapısının doğrulanması Türk hedef şirketler için fundamental rep listesinin merkezindedir. Pay defteri ve MERSİS kayıt doğrulamaları due diligence sırasında ağırlık taşır.
Do: negotiate the fundamental rep list early — its scope dramatically changes seller’s risk profile; insist on capitalisation, title, authority, and tax as a minimum buyer floor.
Don’t: agree to a narrow fundamental list as a seller without adequate disclosure schedule investment — fundamental reps survive longer and have higher cap, so accuracy matters most here.