M&A Vocabulary – Experts explain: Knowledge Scrape vs Materiality Scrape

published on 16 July 2025 | reading time approx. 2 minutes

In this ongoing series, a number of different M&A experts from the global offices of Rödl & Partner present an important term from the specialist language of the mergers and acquisitions world, combined with some comments on how it is used. We are not attempting to provide expert legal precision, review linguistic nuances or present an exhaustive definition, but rather to give or refresh a basic understanding of a term and provide some useful tips from our consultancy practice.

In M&A transactions, securing potential liability risks is of crucial importance. The Warranty & Indemnity (W&I) insurance has become an effective tool and is an integral part of today's M&A market. In particular, so-called synthetic W&I insurance policies are by now common standard in Germany. This means that W&I insurers insure risks to a certain extent, regardless of the wording of the underlying share purchase agreement. A particularly relevant term in this context is “knowledge scrape.” This means that subjective knowledge qualifiers that are regulated for certain seller reps and warranties in the share purchase agreement are irrelevant for the purposes of the W&I insurance. Typically, various reps and warranties in the share purchase agreement are made “to the best of seller's knowledge.” A knowledge scrape removes this knowledge qualifier. As a result, the seller – or, in the case of a W&I insurance, the insurer – is liable for the inaccuracy of a rep and warranty, regardless of whether the seller was aware of the relevant facts or breach of warranty. The knowledge scrape thus transforms subjective, knowledge-based warranties into objective warranties.

This concept has a significant impact on risk distribution in the transaction structure. While a breach of subjective reps and warranties is quite hard to prove in practice – because it is linked to the actual knowledge or negligent lack of knowledge of one or more defined persons – an objective warranty claim with knowledge scrape means that the purchaser can claim coverage under the W&I policy in the event of an objective breach. This also increases the risk for the insurer. W&I insurers respond to this with higher due diligence requirements, potentially higher premiums, and, if necessary, exclusions for particularly risky reps and warranties. From the purchaser's perspective, a knowledge scrape is advantageous because it shifts the risk of discovering unknown or undisclosed matters to the insurer. Since knowledge qualifiers are often highly contested in SPA negotiations, a knowledge scrape can speed up the process by creating additional certainty for both the seller and the purchaser.

In addition to knowledge scrapes, there are also so-called “materiality scrapes.” A materiality scrape removes materiality qualifiers from reps and warranties. The seller usually tries to avoid liability for “immaterial” breaches by limiting the scope of individual reps and warranties (e.g. compliance with all “material” legal provisions) or the scope of the corresponding disclosure (e.g. disclosure of all “material” contracts) in the share purchase agreement. Without precise definitions, such qualifiers can lead to disputes after the transaction about what is “material” and what is not. In addition, the criterion of materiality is traditionally used in share purchase agreements to determine the losses resulting from a breach of warranty, e.g., by excluding minor damages. Such materiality qualifiers can weaken the purchaser's position by either generally excluding a breach of warranty or preventing its enforcement due to thresholds. Materiality scraping offered by W&I insurers can eliminate both materiality qualifiers in individual reps and warranties and thresholds agreed in the share purchase agreement.

From a legal perspective, early consultation with the W&I insurer is decisive for both types of scrapes. Insurers usually only accept comprehensive knowledge scrapes or materiality scrapes if a comprehensive due diligence has been carried out on the purchaser's side and a vendor due diligence report or fact book is available on the seller's side. In addition, consistency between the reps and warranties in the share purchase agreement and the terms and conditions of the W&I insurance should be carefully reviewed to avoid gaps in coverage.