HomeWebcastM&A Representations and Warranties Insurance: Effective Tools and Tactics to Mitigate Risks in Closing the Deal
Online CLE M&A Representations CLE

M&A Representations and Warranties Insurance: Effective Tools and Tactics to Mitigate Risks in Closing the Deal

Live Webcast Date: Thursday, July 12, 2018 from 12:00 pm to 1:30 pm (ET)
CLE InsuranceCLE Mergers and AcquisitionsRecording

Online CLE M&A Representations

Join us for this Knowledge Group Online CLE M&A Representations Webinar. The previous years have seen a significant increase in the use of representations and warranties (R&W) insurance when funding indemnification obligations in M&A transactions. R&W insurance was designed to provide insurance coverage for breaches of representations and warranties by the seller in a purchase agreement, and to potentially mitigate risks, legal traps and pitfalls. This is an alternative form of protection against post-closing indemnification liabilities and other challenges in structuring transactions when closing a deal.

In this Webcast, a seasoned panel of thought leaders and professionals brought together by The Knowledge Group will provide the audience with an in-depth analysis of the fundamentals as well as recent trends and updates in M&A representations and warranties insurance. Speakers will identify common risks and legal pitfalls, and provide with practical tips and strategies to avoid such risks. They will also discuss the role of M&A representations and warranties insurance in deal negotiations.

Key topics include:

  • Representations and Warranties Insurance: An Overview
  • Identifying Common Risks and Pitfalls
  • Benefits, Opportunities and Challenges
  • Current Trends and Updates
  • What Lies Ahead

Agenda

SEGMENT 1:
Ilirjan Pipa, Member
McDonald Hopkins LLC
  • What is R&W Insurance (talk about the what size deals it is used in, retentions, premiums, coverage limit and period, difference between buyer-side and seller-side policies etc.)
  • Terms of Policy – what to look for (typical exclusions from the policy, definition of loss, make sure insurer has no right of subrogation etc.)
  • Why use R&W Insurance (what are its benefits)?

SEGMENT 2:
Victor B. Zanetti, Partner
Katten Muchin Rosenman LLP
  1. Current Status/Term of R&W Insurance
    1. Explosion in the Growth of the product over the last 2 to 3 years
    2. Generally seeing Buy-Side policies in today’s marketplace
    3. Almost a prerequisite to be competitive as a Buyer in a competitive Auction
    4. Large Group of insurance companies joining the marketplace makes for competitive terms – use of insurance brokers
    5. Current terms of policy
      • Retentions have dropped to 1% of Purchase Price (and in some instances even below that); this allows Sellers to have an escrow of only 0.5% of the entire Purchase Price at risk post-Closing.
      • Coverage includes general business representation for 3 years and fundamental representations and tax indemnity for 6 years; versus most negotiated Purchase Agreements of 12 to 18 months for business representations and 6 years or longer for fundamental representations and unlimited for Tax Indemnity (biggest benefit is extension of time to make claims on Business Representations).  With the coverage of Tax Indemnity and Fundamental Representations, the Sellers can have a “hard” cap at 0.5% of the Purchase Price at risk for only 12 months Post-Closing.
      • Pricing is generally 3% plus or minus of requested coverage amount (most Buyers seek coverage of 10%, possibly 15%, of the Purchase Price).

Drafting Tips in Purchase Agreement and R&W policy

  1. Under Purchase Agreement Buyer should get Buyer friendly positions/jump balls on all issues, because the Seller’s skin in the game is only generally 0.5% of the Purchase Price (especially with a true “hard cap”) in lieu of a normal 5% - 10% Escrow Account – specific examples:  undisclosed liability representation not qualified by GAAP; double materiality scrape; silent on consequential damages; very limited use of Knowledge; and broader language than in heavily negotiated Purchase Agreements with 5% - 10% escrow:  provide language examples in slides.
  2. Buyer should seek reimbursement of 50% of the total underwriting costs from Sellers as a Seller Transaction Expense paid at Closing – this includes not only the premium, but also the surplus lines tax and the underwriters due diligence fee (generally ranging from $25,000 to $50,000).  Careful drafting of expense language to be all encompassing – Sellers will generally ask for a limitation on the maximum coverage amount (10% etc.) if they are footing 50% of the bill for the premium costs. 
  3. Sellers really should have no say in the Policy terms other than protecting themselves in the Purchase Agreement that the Policy shall provide that all rights of subrogation will be waived except for subrogation in the case of fraud.  No insurance company will waive subrogation rights for fraud, but it is common place to waive all other subrogation rights.
  4. Silence on consequential damages will allow a Buyer to make claims for consequential damages (including lost profits and multiple of earnings) depending on governing state law – Delaware is fairable to Buyers – whereas the Underwriters will excluded payment of all damage multiples if the Purchase Agreement specifically enumerates them as allowed Damages.

What is not covered

  1. The policy will not cover Purchase Price matters (such as net working capital true-ups and disputes on earnout payments).
  2. Buyer must make an affirmative statement of no knowledge of known representation breaches under the Purchase Agreement by Buyer (effectively an “anti-sandbagging” requirement of the Buyer) – this language can be tailored carefully to Buyer’s benefit such:  provide slide of example language. 
  3. Any known disclosed liabilities (such as a disclosure schedule stating a known law violation) will be excluded from coverage.  In this instance, the Buyer needs to protect itself in the Purchase Agreement by using a traditional “line item” indemnity negotiated with the Sellers which might have holdbacks, caps, baskets etc.
  4. Buyer should push for all first dollar damages under the Purchase Agreement being split 50% by Buyers and 50% paid by Seller’s escrow, as opposed to a true Buyer Deductible.  This is one contentious point of negotiations with the Seller, but on balance I am seeing this in a lot of transactions.

Other Tips

  1. Buyer should not blindly accept an Underwriter’s “standard form”.  Negotiation is possible (see the above example on the Buyer’s Affidavit).  The insurance broker engaged by the Buyer will have very good insight on what can and cannot be changed from each Underwriter.
  2. With repetitive clients (such as PE Funds or Law Firms), the Underwriter should start with the last negotiated form from a previous transaction.
  3. The timeline to complete the underwriting process is very fast – generally under 2 weeks.  The Underwriters have on staff or will engage competent and seasoned M&A attorneys to review all of the materials.
  4. One downside to a Buyer is that the Buyer’s due diligence process will become more expensive based solely on the need to “formalize” advice from third-party experts.  For example, it is customary for the Buyer’s law firm to write a due diligence legal memorandum on all aspects of the Target; while in practice many attorneys and PE Funds have a much more informal (depending on the level of trust) relationship where the attorney can simply point out designated material concerns in a call rather than churning out a lengthy due diligence memorandum.  In addition, a Buyer generally must have a Q of E Report (including a tax report), an Environmental Report (depending on the Target), a Benefits Report, and an IT Systems Report.  These all cost the Buyer more money than if strong working relationships exist with those providers such that truncated targeted advice can be given to the Buyer.

SEGMENT 3:
Jonathan Gilbert, Senior Managing Director
Crystal & Company
  • Process and timeline of procuring  R&W Insurance.
  • If you represent seller in a Buyer-side policy, ensure that Seller / Buyer NDA covers Buyer’s insurers, insurer signs separate NDA or they sign joinder to Buyer’s NDA.
  • What is the process for claims made post-closing?
  • Discuss what are the most frequent claims?
  • Discuss other M&A insurance products.
  • Industry specific underwriting focus / concerns
  • What lies ahead and the future of R&W insurance?

Who Should Attend

  • Sellers and Buyers
  • Deal Counsel
  • M&A Lawyers
  • Insurance Lawyers
  • M&A Professionals
  • Insurance Professionals
  • M&A Insurance Advisers
  • Private and Public Companies

Online CLE M&A Representations

SEGMENT 1:
Ilirjan Pipa, Member
McDonald Hopkins LLC
  • What is R&W Insurance (talk about the what size deals it is used in, retentions, premiums, coverage limit and period, difference between buyer-side and seller-side policies etc.)
  • Terms of Policy – what to look for (typical exclusions from the policy, definition of loss, make sure insurer has no right of subrogation etc.)
  • Why use R&W Insurance (what are its benefits)?

SEGMENT 2:
Victor B. Zanetti, Partner
Katten Muchin Rosenman LLP
  1. Current Status/Term of R&W Insurance
    1. Explosion in the Growth of the product over the last 2 to 3 years
    2. Generally seeing Buy-Side policies in today’s marketplace
    3. Almost a prerequisite to be competitive as a Buyer in a competitive Auction
    4. Large Group of insurance companies joining the marketplace makes for competitive terms – use of insurance brokers
    5. Current terms of policy
      • Retentions have dropped to 1% of Purchase Price (and in some instances even below that); this allows Sellers to have an escrow of only 0.5% of the entire Purchase Price at risk post-Closing.
      • Coverage includes general business representation for 3 years and fundamental representations and tax indemnity for 6 years; versus most negotiated Purchase Agreements of 12 to 18 months for business representations and 6 years or longer for fundamental representations and unlimited for Tax Indemnity (biggest benefit is extension of time to make claims on Business Representations).  With the coverage of Tax Indemnity and Fundamental Representations, the Sellers can have a “hard” cap at 0.5% of the Purchase Price at risk for only 12 months Post-Closing.
      • Pricing is generally 3% plus or minus of requested coverage amount (most Buyers seek coverage of 10%, possibly 15%, of the Purchase Price).

Drafting Tips in Purchase Agreement and R&W policy

  1. Under Purchase Agreement Buyer should get Buyer friendly positions/jump balls on all issues, because the Seller’s skin in the game is only generally 0.5% of the Purchase Price (especially with a true “hard cap”) in lieu of a normal 5% - 10% Escrow Account – specific examples:  undisclosed liability representation not qualified by GAAP; double materiality scrape; silent on consequential damages; very limited use of Knowledge; and broader language than in heavily negotiated Purchase Agreements with 5% - 10% escrow:  provide language examples in slides.
  2. Buyer should seek reimbursement of 50% of the total underwriting costs from Sellers as a Seller Transaction Expense paid at Closing – this includes not only the premium, but also the surplus lines tax and the underwriters due diligence fee (generally ranging from $25,000 to $50,000).  Careful drafting of expense language to be all encompassing – Sellers will generally ask for a limitation on the maximum coverage amount (10% etc.) if they are footing 50% of the bill for the premium costs. 
  3. Sellers really should have no say in the Policy terms other than protecting themselves in the Purchase Agreement that the Policy shall provide that all rights of subrogation will be waived except for subrogation in the case of fraud.  No insurance company will waive subrogation rights for fraud, but it is common place to waive all other subrogation rights.
  4. Silence on consequential damages will allow a Buyer to make claims for consequential damages (including lost profits and multiple of earnings) depending on governing state law – Delaware is fairable to Buyers – whereas the Underwriters will excluded payment of all damage multiples if the Purchase Agreement specifically enumerates them as allowed Damages.

What is not covered

  1. The policy will not cover Purchase Price matters (such as net working capital true-ups and disputes on earnout payments).
  2. Buyer must make an affirmative statement of no knowledge of known representation breaches under the Purchase Agreement by Buyer (effectively an “anti-sandbagging” requirement of the Buyer) – this language can be tailored carefully to Buyer’s benefit such:  provide slide of example language. 
  3. Any known disclosed liabilities (such as a disclosure schedule stating a known law violation) will be excluded from coverage.  In this instance, the Buyer needs to protect itself in the Purchase Agreement by using a traditional “line item” indemnity negotiated with the Sellers which might have holdbacks, caps, baskets etc.
  4. Buyer should push for all first dollar damages under the Purchase Agreement being split 50% by Buyers and 50% paid by Seller’s escrow, as opposed to a true Buyer Deductible.  This is one contentious point of negotiations with the Seller, but on balance I am seeing this in a lot of transactions.

Other Tips

  1. Buyer should not blindly accept an Underwriter’s “standard form”.  Negotiation is possible (see the above example on the Buyer’s Affidavit).  The insurance broker engaged by the Buyer will have very good insight on what can and cannot be changed from each Underwriter.
  2. With repetitive clients (such as PE Funds or Law Firms), the Underwriter should start with the last negotiated form from a previous transaction.
  3. The timeline to complete the underwriting process is very fast – generally under 2 weeks.  The Underwriters have on staff or will engage competent and seasoned M&A attorneys to review all of the materials.
  4. One downside to a Buyer is that the Buyer’s due diligence process will become more expensive based solely on the need to “formalize” advice from third-party experts.  For example, it is customary for the Buyer’s law firm to write a due diligence legal memorandum on all aspects of the Target; while in practice many attorneys and PE Funds have a much more informal (depending on the level of trust) relationship where the attorney can simply point out designated material concerns in a call rather than churning out a lengthy due diligence memorandum.  In addition, a Buyer generally must have a Q of E Report (including a tax report), an Environmental Report (depending on the Target), a Benefits Report, and an IT Systems Report.  These all cost the Buyer more money than if strong working relationships exist with those providers such that truncated targeted advice can be given to the Buyer.

SEGMENT 3:
Jonathan Gilbert, Senior Managing Director
Crystal & Company
  • Process and timeline of procuring  R&W Insurance.
  • If you represent seller in a Buyer-side policy, ensure that Seller / Buyer NDA covers Buyer’s insurers, insurer signs separate NDA or they sign joinder to Buyer’s NDA.
  • What is the process for claims made post-closing?
  • Discuss what are the most frequent claims?
  • Discuss other M&A insurance products.
  • Industry specific underwriting focus / concerns
  • What lies ahead and the future of R&W insurance?

Online CLE M&A Representations

Online CLE M&A Representations

Ilirjan PipaMemberMcDonald Hopkins LLC

Ilirjan is the chair of the Securities Practice Group. He has significant experience in securities, M&A and general corporate transactions. Ilirjan counsels directors and shareholders of public companies on a regular basis on their beneficial reporting requirements and Rule 144 compliance issues. He has represented public and private companies operating in a spectrum of industries related to negotiating and drafting M&A transaction documents and offering documents; negotiating and drafting general corporate agreements; drafting and filing 1933 Act and 1934 Act filings for public companies; and counseled clients on compliance issues raised by the SEC rules adopted as a result of Dodd-Frank and the JOBS Act.

Fluent in Albanian, Ilirjan received his J.D. from Case Western Reserve University School of Law, M.B.A. from Case Western Reserve University Weatherhead School of Management and his B.A. from Baldwin Wallace University. Prior to receiving his J.D. and M.B.A., Ilirjan completed an externship for the Honorable Judge Edmund A. Sargus, U.S. District Judge, Southern District of Ohio.

Online CLE M&A Representations

Victor B. ZanettiPartnerKatten Muchin Rosenman LLP

Victor B. Zanetti has a broad corporate and securities practice that focuses on a variety of matters with a specific emphasis in mergers and acquisitions transactions for both buyers and sellers, including representation of private equity funds, family offices and venture capital growth funds in M&A and corporate finance transactions, as well as founders and selling owners of privately held businesses to both private equity funds and strategic buyers.

Vic represents private equity funds in connection with acquisition, follow-on and sale transactions for portfolio companies involved in various industries, including manufacturing and sales, professional sports, business services, health care services, industrial services and other service industries. Vic was involved in the transaction named "2016 Healthcare Deal of the Year" by M&A Atlas Awards. He also regularly is engaged as special counsel to founders and selling owners in negotiating retained equity stakes when selling their businesses to finance buyers. He also represents both investment funds and recipient public companies in private investments in public equity (PIPE) transactions, involving convertible debt, convertible preferred stock, warrants and related investments. Vic represents owners of professional sports franchises in a variety of matters.

Online CLE M&A Representations

Jonathan GilbertSenior Managing DirectorCrystal & Company

Jon Gilbert is a Senior Managing Director and leads Crystal & Company’s Mergers & Acquisitions practice. Jon has over 10 years of Private Equity Mergers & Acquisitions insurance experience. In addition to his due diligence expertise, Jon has led insurance procurement initiatives for private equity firms nationwide, with a focus on reducing expense and increasing liquidity. He has worked with insurance markets to develop one-off risk transfer solutions to solve deal-related issues, including insuring against breaches of representations & warranties and other contingent liabilities.

He brings a wealth of expertise regarding risk management issues and its financial impact to buyers, including traditional leverage buyouts; public-to-private sales; debt/equity swap; asset sales out of bankruptcy; and corporate divestitures. In 2014, Jon was named as one of M&A Advisors’ “40 Under 40” award recipients.

Online CLE M&A Representations

Course Level:
   Intermediate

Advance Preparation:
   Print and review course materials

Method Of Presentation:
   On-demand Webcast

Prerequisite:
   General Knowledge of M&A Representation and Warranties Insurance

Course Code:
   147321

NY Category of CLE Credit:
   Areas of Professional Practice

Total Credits:
    1.5 CLE

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About the Knowledge Group

The Knowledge Group

The Knowledge Group has been a leading global provider of Continuing Education (CLE, CPE) for over 13 Years. We produce over 450 LIVE webcasts annually and have a catalog of over 4,000 on-demand courses.

About the Knowledge Group

The Knowledge Group

The Knowledge Group has been a leading global provider of Continuing Education (CLE, CPE) for over 13 Years. We produce over 450 LIVE webcasts annually and have a catalog of over 4,000 on-demand courses.

McDonald Hopkins is a business advisory and advocacy law firm with more than 140 attorneys who are focused on providing insight on the challenges of today and foresight for the road ahead.

With offices in Chicago, Cleveland, Columbus, Detroit, Miami, and West Palm Beach, McDonald Hopkins will celebrate its 90th anniversary in 2020. The firm has more than 50 service and industry teams with the expertise and knowledge to meet the growing number of legal and business challenges our clients face.

Website: https://mcdonaldhopkins.com

Katten Muchin Rosenman LLP is a firm of first choice for clients seeking sophisticated, high-value legal services in the United States and abroad. Our nationally recognized practices include Commercial Finance, Corporate, Intellectual Property and Litigation. As a fully integrated firm with 14 offices throughout the U.S. as well as London and Shanghai, our lawyers are skilled at managing complex M&A transactions in the United States and throughout the world. Our more than 600 attorneys serve public and private companies, including a third of the Fortune 100, as well as a number of government and nonprofit organizations and individuals.

We forge partnerships with our clients based on our legal creativity and business practicality—always making our priority how best to serve our client partners. Our clients see us as trusted advisors and we demonstrate our value every day, through our collaborative and goal-oriented approach and, of course, the successful results we achieve.

Website: https://www.kattenlaw.com/

Crystal & Company is the home for talented insurance professionals: creative, committed to their clients and driven to deliver extraordinary results. The company drives the strategy and execution behind insurance and employee benefits programs for businesses that want to be smart about risk. Crystal & Company is the insurance brokerage of choice for leading financial institutions, corporations and nonprofit organizations. Headquartered in New York City, the firm has 11 regional offices throughout the United States. Crystal & Company is an equity owner of Brokerslink, a global broking company with members in more than 95 countries around the world.

The Mergers & Acquisitions Practice supports and advises private equity firms and corporate acquisitive clients on all transaction-related activities, with the goal to identify opportunities that reduce expense, increase liquidity and reduce risk volatility pre- and post-acquisition.

Website: https://www.crystalco.com/

Ilirjan is the chair of the Securities Practice Group. He has significant experience in securities, M&A and general corporate transactions. Ilirjan counsels directors and shareholders of public companies on a regular basis on their beneficial reporting requirements and Rule 144 compliance issues. He has represented public and private companies operating in a spectrum of industries related to negotiating and drafting M&A transaction documents and offering documents; negotiating and drafting general corporate agreements; drafting and filing 1933 Act and 1934 Act filings for public companies; and counseled clients on compliance issues raised by the SEC rules adopted as a result of Dodd-Frank and the JOBS Act.

Fluent in Albanian, Ilirjan received his J.D. from Case Western Reserve University School of Law, M.B.A. from Case Western Reserve University Weatherhead School of Management and his B.A. from Baldwin Wallace University. Prior to receiving his J.D. and M.B.A., Ilirjan completed an externship for the Honorable Judge Edmund A. Sargus, U.S. District Judge, Southern District of Ohio.

Victor B. Zanetti has a broad corporate and securities practice that focuses on a variety of matters with a specific emphasis in mergers and acquisitions transactions for both buyers and sellers, including representation of private equity funds, family offices and venture capital growth funds in M&A and corporate finance transactions, as well as founders and selling owners of privately held businesses to both private equity funds and strategic buyers.

Vic represents private equity funds in connection with acquisition, follow-on and sale transactions for portfolio companies involved in various industries, including manufacturing and sales, professional sports, business services, health care services, industrial services and other service industries. Vic was involved in the transaction named "2016 Healthcare Deal of the Year" by M&A Atlas Awards. He also regularly is engaged as special counsel to founders and selling owners in negotiating retained equity stakes when selling their businesses to finance buyers. He also represents both investment funds and recipient public companies in private investments in public equity (PIPE) transactions, involving convertible debt, convertible preferred stock, warrants and related investments. Vic represents owners of professional sports franchises in a variety of matters.

Jon Gilbert is a Senior Managing Director and leads Crystal & Company’s Mergers & Acquisitions practice. Jon has over 10 years of Private Equity Mergers & Acquisitions insurance experience. In addition to his due diligence expertise, Jon has led insurance procurement initiatives for private equity firms nationwide, with a focus on reducing expense and increasing liquidity. He has worked with insurance markets to develop one-off risk transfer solutions to solve deal-related issues, including insuring against breaches of representations & warranties and other contingent liabilities.

He brings a wealth of expertise regarding risk management issues and its financial impact to buyers, including traditional leverage buyouts; public-to-private sales; debt/equity swap; asset sales out of bankruptcy; and corporate divestitures. In 2014, Jon was named as one of M&A Advisors’ “40 Under 40” award recipients.

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