September 10, 2018

Buy-Side R&W Insurance’s Influence on Deal Terms

This recent SRS Acquiom study has some interesting insights on how buyer R&W insurance policies are influencing the terms of M&A transactions.  This excerpt addresses the impact of a buy-side R&W policy on purchase agreement reps & warranties:

Over 80% of deals with Buy-Side RWI contain neither a 10b-5 nor full disclosure representation and warranty, compared with 58% of other deals. Similarly, when Buy-Side RWI is present, non-reliance and no other representations provisions are less likely to be present, likely driven by sellers limiting as much as possible their representations and warranties to those that are covered by the RWI policy.

Pro-sandbagging clauses are much less prevalent in deals with Buy-Side RWI. The knowledge exclusion present in most Buy-Side RWI policies may prevent buyers from bringing claims for known breaches regardless of the acquisition agreement’s sandbagging wording, so buyers may be less motivated to insist on a pro-sandbagging provision for indemnification purposes when RWI is present, and sellers may fight harder for the agreement to parallel the RWI coverage.

When Buy-Side RWI is used, the acquisition agreement is less likely to require the sellers to notify the buyer of breaches of reps and warranties discovered between signing and closing. Again, since Buy-Side RWI policies typically address interim breaches for transactions involving a separate sign and close, deal parties may be deciding to spend less time negotiating this concept in the acquisition agreement.

With respect to materiality scrapes, RWI insurers tend to follow the provisions of the acquisition agreement. Therefore, it is no surprise that 95% percent of deals with Buy-Side RWI contain some materiality scrape. Furthermore, materiality scrapes for determining both breaches and damages appear in more than half of deals with Buy-Side RWI (but only 30% of other deals), possibly as the parties seek to maximize insurance coverage.

The conventional wisdom is that sellers are more likely to agree to pro-buyer deal terms when R&W insurance has relieved them of most of their indemnification exposure. While the study surmises that this is likely the case with respect to the details of reps & warranties, it says that sellers in deals with RWI use their leverage to obtain pro-seller terms for liabilities that aren’t covered by insurance.

While sellers want to narrow their exposure to uninsured risks, the study also says that both sides are happy to collaborate in increasing the insurer’s exposure – and insurers are responding by hiring former M&A lawyers to better protect their interests in the negotiating process.

John Jenkins