1. Representations and Warranties
4/17/2017
Representations and Warranties
Insurance for M&A Transactions
December 11,
Kevin M. Mattessich, Esq.
Managing Partner, NYC Office
New York, NY
(646)
Jeff Anderson
Allied World Insurance Company
Atlanta, Georgia
(678)
James M. Wilson
Protean Risk
London, England
(011-44) 1

2. 4/17/2017
The Panelists
Jeff Anderson, JD, CPCU, Senior Vice President, North American Mergers & Acquisitions Practice Lead
Jeff Anderson is currently Senior Vice President at Allied World Assurance Company (AWAC) & leads the North American Mergers & Acquisition practice. In that role, he is responsible for profit/loss (P&L), strategy, staffing, underwriting, production and distribution for Transactional Liability Insurance Products, including Representations and Warranties, Contingent Risk, Tax Recapture and Tax Liability Insurance products.
James Wilson, Head of Transaction Solutions at Protean Risk based in London, England
James has over a decade of experience in the Financial & Professional Lines Insurance sector. He has worked for a number of companies, both as an Underwriter and Broker, including Novae Syndicates and AonBenfield. Immediately prior to joining Protean, he was Head of Transactional Insurance for Aspen Insurance. James has expertise in complex and high-value M&A risks across the UK, Europe, Asia-Pacific and the US.
Kevin M. Mattessich, Managing Partner of KDV’s NYC Office
Mr. Mattessich concentrates his practice in securities, fidelity and surety, commercial litigation and insurance law, where he has represented clients all over the globe. Internationally recognized for his experience with commercial litigation, insurance coverage and monitoring matters, Mr. Mattessich represents insurers and their insureds in litigation involving Ponzi schemes, securities act violations, cyber risks, commodities and foreign exchange losses, insider trading, D&O liability and other corporate exposures. Before private practice, Mr. Mattessich served in the Criminal Division of the Department of Justice where he prosecuted white-collar fraud cases. He has also testified before the Judiciary Committee of the U.S. Senate. 2 1

3. 4/17/2017
INTRODUCTION
A Representations & Warranties (“R&W”) Policy provides an insurance option that may assist parties to a merger or acquisition in closing gaps and mitigating transactional risks
The Policy protects against direct financial losses resulting from the breach of representations and warranties relating to the target company or selling shareholders 3 1

4. Entity Transferred Pursuant to PSA
4/17/2017
Introduction
BUYER
SELLER - Shareholders $
Release of Escrow
Earnout Payments
Closing Payment
Entity Transferred Pursuant to PSA
Representations
Indemnity
Ownership 4 1

5. 4/17/2017
Today’s Agenda
What are the potential exposures in a merger transaction to which an R&W Policy might respond?
How might an R&W Policy respond to such exposures?
Must attempt in good faith to promptly, fairly, and equitably settle claims in which liability is reasonably clear
Must settle uncontested parts of claims
Cannot make unreasonable “low-ball” settlement offers
Cannot attempt to settle claims on basis of altered application without notice to insured 5 1

6. 4/17/2017
Two Contracts
The Entity Acquisition Agreement between the Buyers and Sellers (the “Acquisition Agreement” or the Purchase and Sale Agreement (“PSA”))
The Representations and Warranties Insurance Contract between Insurers and the Buyers or the Sellers (the “R&W Policy”) 6 1

7. Acquisition Agreement and
4/17/2017
Acquisition
Buyers
Sellers
Buyers
Acquisition Agreement and
R&W Policy
Underwriters
Underwriters 7 1

8. Overview Acquisition Agreement and R&W Policy are “bespoke” agreements
4/17/2017
Overview
Acquisition Agreement and R&W Policy are “bespoke” agreements
Negotiated among sophisticated parties represented by experienced counsel and advisors
Specialist insurance brokers 8 1

9. Overview “8” corners Contracts reference each other
4/17/2017
Overview
“8” corners
Contracts reference each other
R&W Policy incorporates provisions of the Acquisition Agreement
Both contracts negotiated in context of pending corporate acquisition using terminology common to mergers and acquisitions arena 9 1

10. General damages at law for breach of contract and fraud
4/17/2017
Recovery Overview
General damages at law for breach of contract and fraud
For recovery of breach of contract damages under the Acquisition Agreement, look to its indemnity and limitation provisions
For recovery of Loss under the R&W Policy, look to its indemnity and limitation provisions 10 1

11. Recovery Under The Acquisition Agreement
4/17/2017
Recovery Under The Acquisition Agreement 11 1

12. 4/17/2017
WARRANTIES
Specific or general contractual undertakings found in a PSA that are made by a seller to a purchaser about the company being purchased.
“The Acquired Entity owns the patents, trademarks and copyrights necessary to produce its widgets.”
Tangible assets have, in the aggregate, been maintained in accordance with normal industry practice, are in good operating condition and repair (subject to normal wear and tear) and are suitable for the purposes for which they presently are used.
Each of the Company and its Subsidiaries has valid title to or leases each of the tangible assets used in the conduct of, and that are material to, the business . . .
Must attempt in good faith to promptly, fairly, and equitably settle claims in which liability is reasonably clear
Must settle uncontested parts of claims
Cannot make unreasonable “low-ball” settlement offers
Cannot attempt to settle claims on basis of altered application without notice to insured 12 1

13. 4/17/2017
There are no Proceedings pending ... or, to the Knowledge of the Company, threatened … against or affecting the Company or any of its Subsidiaries …
Financial Statements have been prepared in accordance with GAAP on a consistent basis…. The Company and its Subsidiaries have no Liabilities, except ... 13 1

14. Indemnity Obligations and Limitations Under SPA
4/17/2017
Indemnity Obligations and Limitations Under SPA
“Loss” is defined in the Acquisition Agreement as “any and all claims, damages, liabilities, injuries, demands, settlements, judgments, awards, penalties, Taxes, fees, fines, penalties, liens, losses or other obligations” arising out of the inaccuracy of any representation or the breach of any warranty.
Extent of Indemnity for Loss defined by other provisions. 14 1

15. Indemnity Obligations and Limitations
4/17/2017
Indemnity Obligations and Limitations
“Limitations and Exclusive Remedy” provision of the Acquisition Agreement limits extent of any indemnity.
Disputes concerning “Working Capital Adjustments” will be resolved as set forth within that Section and subject to monetary limitations and special resolution procedures. 15 1

16. 4/17/2017
Entire Agreement
The final written agreement will contain the entire agreement between the parties relating to the merger/acquisition and that it supersedes all previous agreements, representations and other negotiations between the parties (whether written or oral).
Thus, the Representations & Warranties become all important 16 1

17. Indemnity For: Third Party Lawsuits Environmental issues
4/17/2017
Indemnity For:
Third Party Lawsuits
Environmental issues
I.P. Infringement
Product liability claims
Third party guarantees
Tax issues
Disputes over ownership of property and physical activity
Disputes over ownership of shares 17 1

18. Traditional methods for managing risk in M&A transactions:
4/17/2017
Traditional methods for managing risk in M&A transactions:
Reduce purchase price
Raise escrow amounts
Impose more restrictive earnout provisions
Increase contractual protections with respect to R&W, indemnities, etc.
Obtain third-party guarantees 18 1

19. Difficulties Encountered with Traditional Methods of Risk Allocation:
4/17/2017
Difficulties Encountered with Traditional Methods of Risk Allocation:
Frustrates and prolongs negotiations
Exposes buyer to credit and collection risk as against selling shareholder who may have retired
Potential for arbitration/litigation 19 1

20. Recovery Under The R&W Policy
4/17/2017
Recovery Under The R&W Policy 20 1

21. Transaction Solutions Insurance
Transactions (ex. Merger, Recap, Asset Purchase)
Purchase and Sale Agreement (PSA)
Seller
Buyer
Unknown issues:
- Representations and Warranties policy
- Either buyer side or seller side
Known issues:
- Contingent Liability policy
Tax Opinion Policy
Loss Mitigation Insurance
Loss Portfolio Transfer

22. R&W Policy
A non-renewable policy that covers unidentified financial loss arising from breaches of Seller representations
Designed to bridge the gap between buyer and seller
R&W insurance can be purchased by either the buyer or the seller in the transaction. No need for other side to know about insurance
The insurance is not a substitute for the normal negotiations and due diligence that you would expect to be conducted in an M&A transaction.

23. Use of Reps & Warranty Insurance
Buyers
Increase seller cap on liability or extend survival period for warranties
Corporates: concern over counterparty security risk - need to meet minimum security levels for board approval
Private buyers: use insurance strategically to improve their bid position in auction
Can be used if the buyer has concerns about the ability of the seller to service claims (distressed seller)
If Management is continuing on to NewCo
No exclusion for fraud of the seller
Sellers
Corporate Sellers – do not want to be hampered with liabilities from disposals of non core assets as funds required by the business (particularly if distressed)
Clean exit for sellers (particularly individuals)
Private equity seller avoids tying up funds in escrow

24. The R&W policy will not cover
4/17/2017
The R&W policy will not cover
Known breaches or other issues (i.e. matters in the disclosure letter/buyer’s due diligence)
Price adjustment features, including “working capital adjustments”
Fraud by the seller on a seller-side policy
Forward-looking warranties e.g. warranty guaranteeing future collectability of debts/accounts receivable 24 1

25. R&W Claims examples Example #1: Example #2:
Sale of stock in Media company to a Private Equity Firm for over $400M.
Seller-side policy responds to a claim for breach of the various representations resulting from a third party consumer action that arose after the deal close date, but dealt with matters prior to the policy binding date.
Example #2:
Acquisition of a sporting goods store by a strategic purchaser for over $300M.
Buyer-side policy responds to a claim brought by buyer (against the policy) for breach of, among others, the financial statements and accounts receivable R&Ws in connection with the target’s issuance of over $5M of gift cards which had not been properly recorded in the financial statements.

26. R&W Claims examples Example #3:
Acquisition of a software company by a larger strategic purchaser for over $1 billion.
Seller-side policy responds to a claim for breach of the Intellectual Property representation resulting from a third party patent infringement action that arose after the deal close date, but dealt with patents existing prior to the policy binding date.

27. R&W Underwriting Process
1. Receive submission from broker once executed necessary NDA’s; Submission: a. Audited Financials for Target Company; b. Current Acquisition Agreement,; c. Disclosure Schedules (if available) 2. Issue Non Binding Indication (NBIL) 3. If selected proceed with review of legal, financial and tax due diligence reports and disclosure process; 4. Using Legal Engagement Fee, instruct outside counsel to review diligence/disclosure 5. Underwriting call with Insured & their advisors 6. Draft and subsequently negotiate policy Process completed in ‘deal time’

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