Key Representations and Warranties in Tech M&A: Critical Safeguards for Deal Success

In acquisitions and other transactions, representations and warranties (R&Ws) serve as the critical foundation for confirming due diligence efforts and allocating risk between the parties. These contractual assurances cover essential aspects of the target company’s assets and operations—particularly the intangibles like software, data, and IP rights that typically constitute the business case for tech deals—and offer recourse if the reality falls short of what was promised.

But not all R&Ws are created equal. In tech M&A, certain representations take on heightened significance due to the unique risks and assets involved. Understanding which ones matter most—and why—is key to protecting value, avoiding disputes, and closing successfully.

Core IP Representations in Tech Deals

Ownership and Title: The cornerstone of any tech acquisition is confirming the target actually owns what you’re buying. Buyers typically require representations that the target has sole and exclusive ownership of all IP assets, free from encumbrances. This includes clear title to patents, trademarks, copyrights, software, and trade secrets. Critical elements include:

• Confirmation that all employees and contractors have assigned IP rights to the target.
• Assurance that no third party has rights that would limit the buyer’s use of the IP.
• Warranties that the IP is fully usable post-closing.

Discovering post-closing that key assets are encumbered or partially owned by others can devastate the acquisition’s value, making these representations essential.

Non-Infringement and IP Litigation: Closely related to ownership are representations that the target’s products or business do not infringe others’ IP rights, and that no infringement claims are pending or threatened. Targets also warrant that their IP is not being infringed and that necessary third-party IP licenses are in place. Targets often push back on broad non-infringement warranties, especially for patents, due to the complexity of determining infringement. They usually seek knowledge qualifiers or carve-outs for specific IP categories.

Sufficiency of IP Assets: The sufficiency representation warrants that the target has all the IP needed to operate its business as currently conducted and, sometimes, as planned. Buyers want to avoid discovering after closing that critical technology is missing from the bundle of assets being acquired.

Targets may try to exclude non-material IP or off-the-shelf/open-source software from this rep. Its scope is often hotly negotiated. Buyers with leverage may seek to make this a fundamental rep for indemnification purposes—a frequent point of contention.

Open-Source Software Usage

Open-source representations sit at the intersection of IP, compliance, and valuation risk. Given the ubiquity of open-source software in modern tech stacks, buyers increasingly insist on representations covering:

• Full disclosure of open-source components;
• Compliance with applicable open-source license terms; and
• Confirmation that no “viral” open-source code compromises proprietary IP

Best practice favors broad, unqualified open-source reps, since even small license violations can carry outsized risk, and buyers worry about “copyleft” licenses contaminating proprietary code and potentially forcing disclosure or loss of exclusivity. But targets, in turn, resist sweeping open-source representations precisely because open-source use is so pervasive, particularly with widespread use of assistive AI coding tools. For these reasons, targets often seek to limit reps to compliance with internal policies.

This tension likely arises because diligence around open source can directly influence escrow amounts, price adjustments, or pre- and post-closing remediation.

Other Key Representations

Data Privacy and Protection: As data becomes central to tech companies, privacy compliance has gained importance. Typical privacy reps confirm:

• Compliance with privacy laws (GDPR, CCPA, GLBA, HIPAA, etc.)
• Adherence to the target’s privacy policies and contractual obligations
• Rights to use and transfer personal data
• That the transaction itself won’t violate privacy laws or contractual commitments
• No pending regulatory claims or inquiries

Outside tech, many deals still lack tailored data representations. But nearly all companies handle, at a minimum, business-to-business and human resources data, which are protected under major privacy laws such as the California Consumer Privacy Act (CCPA) and General Data Protection Regulation (GDPR). Most also operate websites with cookies or trackers, which create liability under not only comprehensive privacy laws, but also under a recent wave of wiretapping claims against businesses in both tech and non-tech industries. Where data reps are included, they may be qualified by knowledge or materiality, depending on the deal. The more data drives the deal’s value, the more these reps matter.

Cybersecurity and IT Systems: Cybersecurity representations have become essential as incidents – before or after closing – can severely affect acquisition value. Targets typically represent that they:

• Have implemented reasonable security measures;
• Maintain up-to-date security policies and procedures;
• Have had no breaches or security incidents requiring notification; and
• Operate IT systems that are sufficient for current business needs without major reliability issues

Most recent deals include standalone cybersecurity representations, a trend that is accelerating as cyber threats proliferate. Public deal announcements can amplify risks, attracting cybercriminals who recognize that the complexities of post-closing systems integration create unique vulnerabilities for targets and their new parent companies. This makes it critical to fortify any cybersecurity weaknesses identified during due diligence before putting a target on the target’s back by announcing the transaction.

Artificial Intelligence: As AI technology spreads, AI-specific representations are gaining traction. These address unique risks such as:

• Lawful use of training data, including proper licenses and consents.
• Use of open-source tools.
• Algorithmic accountability of the AI (meaning explainability, bias audits, and transparency) reproducibility of its outputs.
• Compliance with evolving AI regulations and ethical standards.
• Security of AI models (against inversion, adversarial attacks, data poisoning), particularly if the model is accessible via API.

A typical AI rep defines “AI Technology” (machine learning, reinforcement learning, deep learning, etc.) and “AI Inputs” (data used to train or improve AI systems), then warrants that the company:

• Has rights to all training data;
• Complies with data use laws and restrictions;
• Implemented procedures to ensure AI technology is reproducible and replaceable, and the AI model has not produced discriminatory or unlawful outputs;
• Implemented reasonable technical and organizational measures to prevent manipulation or exploitation of its AI model by third parties;
• Not used generative AI in ways that adversely affect ownership, validity, or protection of any of its intellectual property;
• Not marketed any AI capability in a manner that is false or misleading; and
• Is not subject to any restrictions on its ability to retrain or commercialize its AI model

These representations are particularly important as the regulatory landscape for AI continues to evolve rapidly.

Strategic Considerations for Buyers and Sellers

For Buyers: Maximize diligence to uncover red flags, ensure known issues are addressed pre-closing, and secure strong protection for unknowns. Focus on core risks—IP ownership, technology functionality, data privacy, and security—and ensure reps and warranties cover them.

Given the importance of IP reps, buyers may seek extended survival periods for them, though sellers often resist. The tug-of-war over scope and duration is common.

For Sellers: Minimize exposure while avoiding operational disruption and deal fatigue. Self-auditing (or reverse due diligence) before going to market can help identify gaps and shape disclosures.

Sellers often seek no-recourse deals (or limited recourse for fraud, with all other claims subject to a representation and warranty insurance policy). If that’s not feasible, they focus on limiting post-sale liability via rep survival periods, special indemnities, and financial caps and baskets. Transparency on key IP, data, security, and AI issues avoids surprises and facilitates smoother closings.

Best Practices in R&W Negotiations

There’s no one-size-fits-all template. Reps should be tailored to the technologies, risks, and business context of each deal. General guidance includes:

Prioritize real risks: Focus on reps that reflect mission-critical areas like ownership, rights, and compliance. Don’t let low-impact reps derail negotiations.

Match diligence: Align reps with diligence findings. Where risks surface, tailor reps and disclosure schedules accordingly.

Factor in insurance: If R&W insurance applies, consider its limits, exclusions, and risk allocations when drafting reps.

Define clearly: Terms like “Intellectual Property,” “Open Source Software,” and “Personal Data” underpin many tech reps. Clarity here avoids gaps and disputes.

Use qualifiers strategically: Apply knowledge or materiality qualifiers where appropriate. IP ownership may warrant fewer limitations to ensure strong buyer protection, while broader representations (like compliance with law) might reasonably include some more tailored qualifications to reflect commercial reality.

Regardless of efforts through signing and closing, a majority of transactions result in some type of post-closing claim or dispute. While IP-related claims are less common than some other types (accounting for approximately 5.2% of all post-closing claims, according to one study¹ they can be particularly serious and costly when they do arise.

Conclusion

Representations and warranties in technology M&A transactions serve as a critical safety net, protecting buyers from hidden liabilities while providing comfort regarding the value they’re paying for. As the technology landscape evolves—particularly with advances in AI, heightened privacy and AI regulations, and growing cybersecurity threats—so too must the representations and warranties that apply to these deals.

Both buyers and sellers must approach these negotiations strategically: buyers to safeguard their investment and, as a last recourse, ensure recourse if assets are not as advertised, and sellers to provide necessary comfort while limiting post-sale liability. When properly negotiated, these provisions not only allocate risk but build trust by creating transparency about what is being bought and sold.

In today’s complex technology acquisition environment, mastering the art of IP and technology related representations and warranties is not just a legal exercise—it is a fundamental business skill for ensuring successful technology transactions.

¹ “Global Representations & Warranties Insurance Claims Study,” Euclid Transactional, 2024.