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.
Why fundamental reps get special treatment
The fundamental representations — title to shares, capacity and authority, due incorporation, no insolvency, often tax — carry the deal’s existential risks, so they escape the standard indemnity architecture: longer survival (statute-of-limitations length versus 12–24 months for business reps), higher or uncapped liability ceilings (purchase price rather than the general indemnity cap), and exclusion from baskets and de minimis thresholds. The negotiation is taxonomy: buyers push reps into the fundamental bucket, sellers resist — IP ownership and data-protection compliance are the modern battlegrounds. In W&I-insured deals the policy mirrors the split, pricing fundamental cover separately. Turkish practice imports the architecture wholesale into SPAs; the local nuance is aligning survival periods with Turkish limitation rules so the contract’s promise matches what a court will enforce.