Anatomy of the Purchase Agreement: Reps, Covenants, Conditions, MAEs and Indemnities

The definitive agreement turns the deal into enforceable promises: representations and warranties describe the business, covenants govern conduct before and after closing, conditions decide whether a party must close, and indemnification allocates losses afterward. Material adverse effect clauses set a high bar for walking away, which Delaware courts first found met in Akorn v. Fresenius ^[3][5]. Market studies show how caps, baskets, sandbagging and materiality scrapes are typically negotiated ^[1][2].

The map of the agreement

Whether it is called a stock purchase agreement, an asset purchase agreement or a merger agreement, the definitive agreement usually follows the same outline: definitions; the transaction mechanics and price, including adjustments; the seller's and target's representations and warranties; the buyer's representations; covenants; conditions to closing; indemnification or, in public deals, its absence; termination rights; and general provisions such as governing law. Reading the definitions first is not pedantry; terms such as Indebtedness, Losses, Knowledge and Material Adverse Effect decide how much each article is worth.

Representations and warranties

Representations and warranties are statements of fact about the business at signing, usually repeated as of closing: organization and authority, capitalization, financial statements, undisclosed liabilities, material contracts, taxes, employees and benefits, IP, data privacy, litigation, compliance and more. The seller qualifies them through a disclosure schedule that lists exceptions. Two drafting choices shift a great deal of risk. The first is knowledge: Goulston & Storrs reports that 90% of deals in the 2025 ABA study used a constructive-knowledge formulation, meaning what a person would reasonably be expected to know after due inquiry, rather than actual knowledge ^[1]. The second is the catch-all disclosure representation: the same summary reports that so-called 10b-5 representations appeared in only 5% of deals in the 2025 study, down from a peak of 67% in the 2009 publication ^[1].

Many representations are qualified by materiality (for example, no litigation that is material). A materiality scrape tells the parties to read those qualifiers out when calculating losses, determining whether a breach occurred, or both. Goulston & Storrs reports that a materiality scrape appeared in 87% of agreements in the 2025 study ^[1], and K&L Gates reports that double materiality scrapes, which apply to both questions, rose from 69% in the prior study to 82% ^[2].

Covenants

Covenants are promises to do or not do things. Interim covenants require the seller to run the business in the ordinary course between signing and closing and to get the buyer's consent for listed actions such as new debt, large contracts or changes to compensation. Efforts covenants govern how hard each side must work to satisfy conditions, including regulatory approvals. Thompson Coburn notes that in the Johnson & Johnson earnout case the Delaware court said Delaware courts have viewed variations of efforts clauses, particularly those using the word reasonable, as largely interchangeable, so careful drafting of what efforts are expected matters more than the label ^[6]. Post-closing covenants include non-competes, non-solicits and cooperation on taxes.

Conditions and the MAE clause

Conditions decide whether a party must close. Typical buyer conditions include the bring-down of the seller's representations (often true except where failures would not have a material adverse effect), performance of covenants, regulatory approvals, key third-party consents and the absence of a material adverse effect since signing. Akerman's guidance is that closing conditions should be thoughtfully limited but candid, identifying required consents and approvals and a no-MAE condition ^[7].

An MAE clause defines when a change in the target's business is serious enough that the buyer need not close. Simpson Thacher summarizes the Delaware standard from IBP v. Tyson Foods: an MAE requires unknown events that threaten earnings potential in a durationally significant manner ^[4]. In Akorn v. Fresenius, the Delaware Supreme Court held that the record supported the Court of Chancery's determination that Akorn had suffered an MAE that excused Fresenius from closing, and that Fresenius properly terminated the merger agreement because Akorn's breach of its regulatory representations gave rise to an MAE ^[3]. Jones Day describes the decisions as the first time Delaware courts found, and affirmed, that an MAE had occurred, while stressing that the threshold remains extremely high ^[5]. K&L Gates notes that the 2025 ABA study began tracking how often MAE definitions specify that a fact or condition existing at signing could constitute an MAE ^[2].

Indemnification

In private deals, indemnification is the main remedy for breaches discovered after closing. Akerman lists the terms sellers negotiate: survival periods, deductible or tipping baskets, mini-baskets that screen out small claims, caps, carve-outs from caps and baskets, escrows, anti-sandbagging and the definition of losses ^[7]. Goulston & Storrs reports that the mean indemnity cap rose from just over 6% of transaction value in 2021 to almost 16.79% in 2025, that 89% of deals made indemnification the exclusive remedy, and that 85% of those included a fraud carve-out ^[1]. On sandbagging, whether a buyer can recover for breaches it knew about before closing, 69% of deals were silent, 28% were expressly pro-sandbagging and 4% were anti-sandbagging ^[1].

Insurance changes the picture. Taft notes that the standard RWI limit is 10% of enterprise value and that customary policy survival is three years for general representations and six to seven years for fundamental and tax representations ^[8]. K&L Gates reports that deals in which representations do not survive closing rose to 41% in the 2025 study, which it ties to greater RWI use ^[2].

Worked example: baskets and caps

• Deal: $100 million price, basket of 0.5% ($500,000), cap of 10% ($10 million), no RWI.
• Post-closing, the buyer proves $1.8 million of losses from a breach of the contracts representation.
• Deductible basket: the seller pays only losses above the basket, $1.8 million − $0.5 million = $1.3 million.
• Tipping (first-dollar) basket: once losses exceed $500,000, the seller pays from the first dollar, $1.8 million.
• If losses were $14 million, the seller would pay no more than the $10 million cap, unless the breach fell within a carve-out such as fraud or fundamental representations.

Termination

Termination provisions let a party walk away before closing if conditions cannot be met by an outside date, if the other side materially breaches, or in public deals if the board accepts a superior proposal. In Akorn the termination right was itself the battleground: the Supreme Court noted that Fresenius could terminate because it had not engaged in a prior material breach of its own covenants that would have blocked the right ^[3].

Key terms

Representations and warranties

Statements of fact about the target in the purchase agreement, qualified by a disclosure schedule.

Disclosure schedule

The seller's list of exceptions to its representations, which shapes what counts as a breach.

Materiality scrape

A clause that disregards materiality qualifiers in representations when determining breach, calculating losses, or both (a double scrape).

Bring-down condition

A closing condition that the representations remain true at closing, often to a stated materiality standard.

Material adverse effect (MAE)

A defined, durationally significant adverse change in the target that can excuse the buyer from closing.

Deductible vs. tipping basket

A deductible basket covers only losses above the threshold; a tipping basket covers losses from the first dollar once the threshold is exceeded.

Indemnity cap

The maximum the seller must pay for indemnifiable losses, usually with carve-outs for fraud and fundamental representations.

Sandbagging

A buyer's recovery for a breach it knew about before closing; agreements may permit it, prohibit it or stay silent.

Check your understanding

Sources

1. [1]Goulston & Storrs, “2025 ABA Private Target M&A Deal Points Study: What's Market?,” May 6, 2026.
2. [2]K&L Gates, “2025 ABA Private Target Mergers Acquisitions Deal Points Study,” December 19, 2025.
3. [3]Supreme Court of the State of Delaware, “Akorn, Inc. v. Fresenius Kabi AG, No. 535, 2018 (Order),” December 7, 2018.
4. [4]Simpson Thacher & Bartlett LLP, “Delaware Supreme Court: Affirms Chancery Court Decision Finding a “Material Adverse Effect” for the First Time,” December 21, 2018.
5. [5]Jones Day, “Delaware Supreme Court Affirms Landmark MAE Ruling,” December 2018.
6. [6]Thompson Coburn LLP, “Lessons from Recent Decisions on Earnout Disputes,” November 20, 2024.
7. [7]Akerman LLP, “Private Equity Mergers and Acquisitions, Session 1: Acquisition Process,” March 24, 2021.
8. [8]Taft Stettinius & Hollister LLP, “Representations and Warranties Insurance: Introduction and Policy Framework,” July 29, 2024.

Educational content only — not legal, tax, or investment advice, or an offer to sell or a solicitation of an offer to buy any security. Rules and data are described as of November 2026 and may change. Securities offered through Umergence LLC, Member FINRA/SIPC.