Representations & Warranty

Insurance

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 Meet The Presenters

Nancy Adams
Partner
Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, PC

Jeffrey Cowhey
President
Ambridge Partners LLC

Moderator – William Monat

Senior Vice President, Mergers & Acquisitions Group
Willis

Professional Liability Underwriting Society

 Disclaimer

For a full and complete description of coverage terms and conditions, please review the
insurance policy. The information contained herein is not an offer to sell or a solicitation
to buy any insurance policy or product. No insurance policy, product, or service is
offered or will be solicited in a jurisdiction in which such offer, solicitation, purchase or
sale is prohibited or unlawful under applicable law or the laws of any country or
jurisdiction. The presenters make no statement or representation to any person or entity
as to the potential tax or accounting consequences or treatment of any transaction or
matter. For reasons of confidentiality, the examples given have been amended so that
they are fictional and do not describe actual client circumstances. Please be advised
that any information, analyses and/or opinions contained in this communication are not
intended or written to be state or federal tax advice and may not be used for the
purpose of avoiding penalties under the Internal Revenue Code, or promoting,
endorsing, marketing or recommending to another party any matters addressed herein.
The presenters neither broker nor underwrite Tax Insurance in connection with taxes,
interest or penalties that may be incurred in connection with any “listed” or “reportable”
transaction within the meaning of Treasury Regulation section 1.6011-4(b)(2).

Professional Liability Underwriting Society

 Representations & Warranties
Insurance
• Representations & Warranties Insurance covers loss incurred
as a result of the inaccuracy or breach of representations and
warranties in connection with the sale of a business or
crystallization of exposures covered under an indemnity (such
as a tax or other specific indemnity) and can be sold to:
– Buyer or Seller
– Primary difference is that seller/maker policy does not cover
fraud/dishonesty
• The product is also known as Reps & Warranties or R&W in the
US; and Warranties & Indemnities or W&I in the UK, EU and the
rest of the world

Professional Liability Underwriting Society

 Background on Transaction
Agreement
• A comprehensive document memorializing the terms and conditions of
sale of assets or stock
• Indemnity Agreement:
• Survival period
• Threshold amount
• Indemnity caps and escrows
• De minimis amount
• Representations:
• Purpose
• Breadth and scope of the representations
• Materiality/knowledge qualification
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 Common Reps & Warranties
Include
• Title to Shares • Taxes
• Capitalization and Authority • Customers and Suppliers
• Financial Statements • Litigation
• Compliance with Laws • Real and Personal Property
• Labor and Employment • Environmental Matters
• Employee Benefit Plans • Contracts
• Intellectual Property • Insurance

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 R&W Insurance:
Road Blocks and Risks
• R&W Insurance can address roadblocks to completion of a
transaction by:
• Eliminating or reducing perceived or identified exposures
that prevent completion of the transaction
• Addressing disagreements on the allocation of financial
risk for the perceived or identified exposures
• Types of risks covered include:
• Disclosure risk
• Legal/judicial interpretation risk
• On-off contingency risks (other than financial or
performance guaranty)
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 R&W Scenario:
Reducing an Escrow
• Scenario: The target company in a pending transaction, Company X, is a
manufacturing company owned by a family with several third and fourth
generation family members holding all of the equity and significant management
control of the Company.
• Challenge: Buyer of Company X requires an indemnity for breaches of all
representations and warranties and an escrow to backstop the indemnity from
the sellers. However, due to divergent interests among the family members
and the desire to realize the sale proceeds soon after the sale, the sellers are
not willing to place a significant amount of the sale proceeds in escrow.
• Solution: The transaction is structured with a minimal escrow that survives for
one year. An R&W Policy is issued to the buyer, which provides a limit in
excess of the escrow that covers breaches of any representations for a period
of six years. For the buyer, this insurance solution provides (i) an indemnity
which meets their requirements in terms of indemnity amount and survival, and
(ii) a single source of recovery instead of pursuing multiple sellers. For the
sellers, this solution allows them to have a minimal escrow as their sole post-
transaction obligation which can be distributed soon after the sale.

Professional Liability Underwriting Society

 R&W Scenario:
Selling Assets out of Bankruptcy
• Scenario: Company X has filed for Chapter 7 bankruptcy. The
liquidator in charge of disposing of the Company’s remaining assets is
now selling the properties which were previously owned by the
Company.
• Challenge: The liquidator is selling the properties “as is” and is not
willing to provide an indemnity to the buyer for breaches of market
standard representations and warranties. The buyer, while confident in
the due diligence it has conducted on the properties, is concerned that
undisclosed issues could be discovered post-closing that diminish the
properties’ value.
• Solution: An R&W Policy is issued to the buyer for the full amount of
indemnity desired with coverage tailored to protect the buyer as if the
liquidator had sold the properties with “standard” representations and
warranties.
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Professional Liability Underwriting Society

 R&W Scenario:
Securing an Indemnity
• Scenario: Due to recent liquidity concerns and in an effort to strengthen
its balance sheet, a financial institution is selling off one of its non-core
businesses.
• Challenge: The potential purchaser is demanding an escrow for any
breaches of Representations and Warranties due to the fact it does not
believe there is a high likelihood that the seller will remain solvent and
therefore be able to perform its indemnity obligations under the
Purchase and Sale Agreement. However, the seller is unwilling to
provide an escrow.
• Solution: The seller provides an indemnity for any breaches of its
Representations and Warranties and also purchases an R&W Policy for
the benefit of the buyer which will indemnify the buyer in the event (i)
there is a breach of a R&W, and (ii) the seller is financially insolvent.

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 R&W Scenario:
Facilitating Investment
• Scenario: The target company in a pending joint venture arrangement,
Company X, produces a wide range of custom electronic devices for clients in
the medical field. The shareholders of Company X have received a letter of
intent from a long-time business partner to enter into a joint venture agreement
whereby they would purchase a 20% interest in Company X.
• Challenge: The 20% investor requires a standard indemnification for potential
breaches of representations and warranties. However, due to the nature of the
transaction, whereby the investor and existing owner will jointly own and
manage the company going forward, they would like to avoid any potential
disruption of their relationship and operations in the event of a dispute regarding
possible breaches of representations and warranties.
• Solution: An R&W Policy is issued covering the investor for damages it incurs
as a result of breaches of any of the original owner’s representations. This
insurance solution provides the desired protection to the investor and alleviates
the likelihood of a strain on the relationship with their joint venture partner had
the investors required a traditional indemnity.

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Professional Liability Underwriting Society

 R&W Insurance:
Summary of Insureds and Transactions
• Identity of insured under policies can vary depending on strategic
objective:
• Target, where concern is impact on target if exposure crystallizes
• Third parties such as buyer, investor, or lender where concern is
limited to impact on their interest
• Combination of one or more of the above
• Can be utilized in connection with a wide variety of transactions:
• M&A
• Restructuring, insolvency or liquidation
• Finace/Loan
• Licensing of IP
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 Conclusion

When used effectively, Transaction Insurance can provide

the parties to a transaction with protection from the
unintended financial consequences of known and/or
unforeseen potential exposures that might otherwise have
prevented closure of the transaction.

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 Questions?

Please forward questions to the panelists via your

GoToWebinar dashboard.

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 Panelist Contact Information
Nancy Adams
Partner
Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, PC
ndadams@mintz.com

Jeffrey Cowhey
President
Ambridge Partners LLC
jcowhey@ambridgepartners.com

Moderator – William Monat

Senior Vice President, Mergers & Acquisitions Group
Willis
bill.monat@willis.com

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 Thank You Diamond
Sponsors

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 Appendix of Additional Information

The following slides are provided for informational purposes

and may or may not be used during the course of the
presentation.

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 Reasons for Using R&W Insurance
• Indemnification dynamics – bridging gap between seller versus buyer
objectives
• Strategic use by buyers and sellers
• Supplement the indemnification for buyers – increase the size or length of
indemnification – i.e. supplement escrow/cap with additional
indemnification and/or increase survival term
• Protect passive investors
• Allow seller to limit indemnification – lower escrows/caps and shorter
survival
• Strategic buyer/Private Equity seller applications
• Security where concern over collecting indemnification
• Provide indemnification in non-recourse deals such as bankruptcy sales,
take private transactions, and ESOP transactions

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Professional Liability Underwriting Society

 R&W Insurance:
Additional Potential Applications
• Lender to start-up pharma company has concerns with adequacy of IP
reps and warranties given under licensing agreement by the licensor of
the key IP and licensor is unwilling to amend its position
• R&W Insurance policy provides coverage for loss incurred as a
result of breach of “synthetic” IP reps and warranties that meet
lender’s requirements
• Company is being marketed and significant due diligence has been
conducted. However, as administrator will not provide prospective
buyers with any reps and warranties, offers are being significantly
discounted
• R&W Insurance policy providing “synthetic” warranties (with no
recourse against administrator) is provided to potential buyers
leading to enhanced offers

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Professional Liability Underwriting Society

 R&W Insurance:
Additional Potential Applications
• Buyer requires that seller retain liability equal to 30% of deal
consideration in respect of breaches of reps and warranties, while seller
is only willing to assume liability for up to 10% of deal consideration
• R&W Insurance policy covers buyer for loss resulting from breaches
exceeding 10% of deal consideration up to a limit of 30% of deal
consideration
• Seller’s weak financial position causes buyer to require that security be
posted for seller liability for breach of any reps and warranties
• R&W Insurance policy covers buyer for loss resulting from breaches
only if seller is unable to meet the liability it has agreed to assume
under the sale agreement

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Professional Liability Underwriting Society

 Program Structures
Increase Amount of Indemnity

$ 100M

Transactional Insurance
Policy increases amount
of financial protection
Amount

Scope of Indemnity

Agreed scope, amount and

time limits for bringing claims

$1
1 day Time limit for bringing claims 7 years

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Professional Liability Underwriting Society

 Program Structures
Backstop to Indemnity
Amount

Transactional Insurance Policy

Agreed scope, amount and responds if indemnitor is unable to
time limits for bringing claims respond because of its insolvency

$1
1 day Time limit for bringing claims 7 years

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Professional Liability Underwriting Society

 Program Structures
Extend Expiration of Indemnity

Transactional Insurance Policy extends time

period during which claim can be brought
Amount

Scope of Indemnity

Agreed scope, amount and

time limits for bringing claims

$1
1 day Time limit for bringing claims 7 years

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Professional Liability Underwriting Society

 Program Structures
“Ground Up” Cover
Amount

Transactional Insurance
provides "ground up" cover
for exposure

$1
1 day Time limit for bringing claims 7 years

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Professional Liability Underwriting Society

 Program Structures
Increase Scope of Indemnity

Transactional Insurance Policy

increases scope of agreed
Amount

indemnity
Scope of Indemnity
Agreed scope, amount and
time limits for bringing claims

$1
1 day Time limit for bringing claims 7 years

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Professional Liability Underwriting Society