Trends in private M&A: representations and warranties indemnity insurance (IBA Annual Conference, 2019)

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Report on a session of the Closely Held and Growing Business Enterprises Committee and the Corporate and M&A Law Committee at the IBA Annual Conference, Seoul

Wednesday, 25 September 2019

Rapporteur

Sandeep Mehta

J Sagar Associates, Mumbai

sandeep.mehta@jsalaw.com

Session Co-Chairs

Caroline Conrad-Behr Conrad & Partner Advokatur, Baden

Ivan Delgado Pérez-Llorca, New York

Speakers

John Kim  Lee & Ko, Seoul

Sue Hyun Lim  KCAB International, Seoul

Brett Moffat  Marsh Korea, Seoul

Ignacio Pesqueira  Galicia Abogados, Mexico City

Veronica Andrea Zarate  Mitrani Caballero & Ruiz Moreno, Milan

During this session, the current trends in private mergers and acquisition (M&A) transactions relating to representations and warranties/indemnity insurance (RWI) were discussed by a selection of international speakers.

RWI provides coverage against losses arising from a breach of contract, that is, a breach of seller’s representations and warranties given to buyer in a transaction (eg, share deal, asset deal, merger). It covers unknown events (ie, issues not disclosed during or after due diligence, up until closing).

The speakers pointed out that the insurance has gained world-wide increased importance in M&A transactions in the past two to three years.

The speakers discussed the benefits of such insurance:

• alternative to escrow mechanism (no liquidity tied);

• deal facilitation by managing the risk when investing in an unfamiliar jurisdiction or industry;

• maintenance of relationship with the acquired management post acquisition;

• enhancement of bidder status in an auction process;

• assurance of clean exit by distribution of sale proceeds back to investors;

• loss protection against seller's default; and

• ability to recover loss.

The panel gave very good insight on the process of obtaining such insurance. Based on their practical experience, all speakers agreed that the process should be started as soon as possible:

• non-binding quotes from insurers should be obtained last after providing copies of the draft sales and purchase agreement (SPA) and information memorandum to the target entity;

• risks that potentially might be deal breakers shall be identified by seller and discussed with the brokers and insurers under confidentiality agreements; and

• the negotiations of the insurance policy are to be undertaken in parallel with the negotiation of the underlying transaction.

Lessons learned from practical experience:

• the insurance policy is not a substitute for the due diligence of the target entity;

• the insurer will ask to be given access to the due diligence report and ask for an English version of it;

• the matters disclosed in the due diligence report and data room are generally excluded from the RWI regardless of the position in the SPA;

• generally, the buyer takes into consideration the insurance policy premium when negotiating the purchase price;

• the insurance coverage may differ depending on the jurisdictions;

• some countries require local insurers (ie, an insurer in the country where the target company is located); and

• no insurance coverage is provided in relation to the holding company of the target company.

The panel concluded the session by discussing the issue of claim notification under the insurance policies. According to AIG’s 2019 Claims Report:

• one in every five RWI policies issued globally reported a claim;

• nearly 60 per cent of the claims exceeded US$1m;

• three-quarters of all claims under insurance policies were notified in the first 18 months;

• generally, more claims were filed at the end of the insurance policy period; and

• the highest claims under the insurance policies were filed in relation to: (i) financial statements; (ii) tax issues; and (iii) compliance with laws by the target entities.

The distinguished speakers unanimously concluded that the use of RWI will continue to rise due to increasing cross-border merger and acquisition transactions.

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