Bring-Down Certificate

What is a bring-down certificate?

Bring-down certificate (Vollzugsbestätigung, confirmation of the warranties) refers to a written statement by the seller on the closing date, that is, the day on which the shares and the purchase price are exchanged. In it, the seller confirms that the warranties given in the company purchase agreement are also accurate at that point in time and that the seller has complied with its obligations up to closing. Warranties are commitments by the seller regarding certain facts, such as customer contracts, taxes or litigation, for the accuracy of which the seller must stand. The confirmation is, as a rule, a condition for the buyer being obliged to pay the purchase price.

A similar situation arises when a used car is sold and collected only weeks after the purchase contract was signed: on handover, the seller states once more that the car has remained accident-free since signing.

The confirmation matters when time passes between signing and closing, for example because the Federal Cartel Office (Bundeskartellamt) must first review the acquisition. The purchase agreement deals with it in two places: in the list of closing conditions and in the warranties, to the extent that these are repeated on the closing date. In the US market, a senior officer of the target company usually signs (officer's certificate). In German contracts, the seller generally gives the confirmation, because the seller has also assumed the warranties. The seller often relies on information from the management of the target company.

Closing condition and repetition of the warranties

As a closing condition, the confirmation protects the buyer from taking over a business whose condition has changed materially since signing. If the seller cannot give it to the agreed extent, the buyer does not have to complete. The buyer can waive the condition, seek an agreement or wait to see whether the deviation is remedied by the latest closing date.

Liability is a separate matter. German purchase agreements often provide that the seller gives the warranties both as of the signing date and as of the closing date. The seller is then also liable for circumstances that arise only between the two dates. Sellers therefore try to repeat only the fundamental warranties, for example that the shares in the company exist and are not encumbered with third-party rights such as a pledge. It must also be settled whether the seller may supplement its disclosure (disclosure schedule) before closing and whether such supplements exclude its liability or merely inform the buyer. If a W&I insurance policy (insurance against breaches of warranty) has been taken out, breaches that become known between signing and closing are frequently excluded from cover.

Standard of the confirmation

Materiality and double materiality

A contract rarely requires every warranty to be accurate in every detail on the closing date. It is common for the warranties to have to be accurate in all material respects, while fundamental warranties must be entirely correct. A more seller-friendly standard is one under which only deviations that together amount to a material adverse change within the meaning of a MAC clause prevent closing.

If an individual warranty already contains a materiality qualifier, for example “no material litigation”, a double materiality test arises: the deviation must be material for the warranty and once again for the condition. To avoid this, many contracts provide that materiality qualifiers in the warranties are disregarded when testing the condition. In the market, this technique is called a materiality scrape.

Knowledge qualifiers

Warranties given “to the seller's knowledge” refer, when repeated, to the state of knowledge on the closing date. If the seller has meanwhile learned of a lawsuit or a termination, the seller can no longer confirm the warranty without qualification. The contract should therefore specify whose knowledge counts and whether there is a duty to make enquiries of the management.

Liability and the buyer's knowledge

The confirmation is a declaration of knowledge with legal weight. Anyone who gives it against better knowledge acts intentionally. Contractual limitations of liability such as deductibles and liability caps then do not help, because liability for intent cannot be excluded in advance (Section 276(3) of the German Civil Code, BGB). Liability in tort may also arise, which can affect the signatory personally.

On the buyer's side, the reverse question arises: whether the buyer keeps its claims if it completes with knowledge of a deviation. Under Section 442 BGB, a buyer loses rights in respect of a defect that the buyer knows of when the contract is concluded. For independent warranties (selbständige Garantien), purchase agreements usually regulate the effect of the buyer's knowledge themselves. If there is no provision for knowledge that arises only after signing, there is a risk that completion without reservation is construed as a waiver.

Practical example

A software company is sold for EUR 18.2 million, seven times its EBITDA (earnings before interest, taxes, depreciation and amortisation) of EUR 2.6 million. A good three months pass between signing and closing because a regulatory clearance has to be awaited. One warranty states that no customer with more than EUR 250,000 in annual revenue has terminated. The warranties are repeated on the closing date, and the standard for the condition is “in all material respects” without regard to individual materiality qualifiers.

• Six weeks before closing, a customer with EUR 400,000 in annual revenue gives notice of termination.
• The contribution margin of this customer (revenue less directly attributable costs) is 70%, so 400,000 × 70% = EUR 280,000 that will be missing from EBITDA in future.
• That is EUR 280,000 / EUR 2.6 million = around 10.8% of EBITDA. Both sides therefore assume that the deviation is material.
• On the basis of the purchase price multiple, this corresponds arithmetically to 280,000 × 7 = EUR 1.96 million of enterprise value.
• The seller cannot confirm the warranty and discloses the termination before closing.
• The parties reach an agreement: the buyer waives the condition, the purchase price falls by EUR 1.2 million to EUR 17.0 million, and claims arising from this termination are settled.

The agreement is below the arithmetical value because the seller could point to reasons for the termination that did not lie with the company, and because both sides wanted to avoid a postponement of closing.

Distinction from related terms

• Closing conditions: all prerequisites for closing. The confirmation evidences one of them, the accuracy of the warranties.
• Warranty: the actual commitment by the seller in the purchase agreement that certain facts are true. As a rule, the confirmation does not create a new warranty but documents the position on the closing date.
• Disclosure schedule: the disclosure of exceptions to the warranties before signing. Supplements up to closing require their own provision.
• MAC clause: relates to a material deterioration of the business as a whole, whereas the confirmation relates to the accuracy of individual statements.

Common mistakes

• Overlooking double materiality. Without clarification, a deviation must be classed as material twice before it prevents closing.
• Buyer's knowledge left unregulated. It then remains open whether the buyer still has claims after completing with knowledge of the deviation.
• Supplements to the disclosure left unregulated. Without a provision, it is unclear whether a supplement excludes liability or merely enables withdrawal.
• Confirmation without own review. Sellers who give the confirmation without a documented enquiry of the management take on an avoidable liability risk.
• Unclear role of the signatory. If a managing director signs, it must be clear whether the declaration is made on behalf of the seller, on behalf of the company or personally.

Frequently asked questions

Who signs the bring-down certificate?

As a rule, the seller; where the seller is a company, its management. Because the seller often does not have an overview of day-to-day business, the seller obtains a confirmation from the management of the target company beforehand.

Must every warranty be fully accurate on the closing date?

No. Accuracy in all material respects is usual. Usually only fundamental warranties, such as those on the existence of the shares, must be fully accurate.

What happens if the seller cannot give the confirmation?

Then a closing condition is not met. The parties usually negotiate a waiver in return for a purchase price reduction or an indemnity. If no agreement is reached, the buyer can withdraw after the long stop date has passed.

Is the confirmation needed if signing and closing take place simultaneously?

No. If signing and closing fall on the same day, the warranties are given at that point in time anyway, and there is no period for which a repetition would be needed.

Is the seller liable for events after signing?

Only if the warranties are repeated on the closing date or the contract expressly so provides. For the period until closing, the obligations to continue the business in the ordinary course also apply.

The Roemer Capital view

Before the closing date, we go through the warranties point by point with the client's management against developments since signing: customer terminations, new litigation, staff departures, deviations in the financial figures. Anything that has changed is raised with the buyer early. That way the purchase price is no longer being negotiated on the closing date.

Already in the contract negotiation, we pay attention to which warranties are repeated and which standard applies to the condition. Both points determine how much risk from the period until closing remains with the seller. The drafting is the responsibility of the law firm; we prepare the commercial assessment of individual deviations.