B F L M A K E S A D I F F E R E N C E

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In this Issue

Editorial 1

Facilitating M&A Deals with a Representations and Warranties Insurance 2-3

What is a Health Spending Account (HSA)? 4

EDITORIAL

Barry F. Lorenzetti

Risks and Benefits

a specialized field and that only cyber experts are equipped to handle the issue. Unfortunately, gateways and firewalls are no match for this ugly monster.

A risk is a risk is a risk and it needs to be managed, whatever its nature. Risk managers are the professionals in the field and they need to be at the helm on this matter. Management needs to broaden its view on cyber risk and realize that, as with any type of risk, success relies on a collaborative approach where all functions of the organization work together towards a common goal. Company-wide input and participation are key factors. The classic response of transferring the burden to the IT team will not do; the risk is no longer limited to technology, it has evolved.

The threats are mostly external, but let’s not be naïve, they can also come from within. A lack of proper instructions can lead to accidental data breaches

yber risks and their consequences have become daily news.

Some – such as the Sony case, for instance – are more spectacular than others and much more publicized. The abundance of information on the topic might lead us to take it less seriously than we should, considering it as today’s new norm.

Not so long ago, we were mostly worried about data breaches. Now, things have escalated to another level: we are dealing with the commercialization of cyber risks and a wide range of scenarios where criminals make money at others’ expense.

One thing is certain, cyberspace is here to stay. We live our lives and run our companies in it and ignoring the risks will not make them go away. And as the nature of cyber risks becomes more complex, force is to recognize that many companies are still not well organized to manage them. So far, most organizations have left the management of cyber risks in the sole hands of their IT unit under the premise that it is

C

from employees, a disgruntled staff member could decide to take revenge or an employee with financial difficulties could accept a bribe to cooperate with external accomplices.

Every employee can become the eyes and ears of an organization and do his or her part to minimize the risk, but in order for the company to benefit from their contribution, they must be in on the strategy and understand how their own actions can affect the risk. All they need are clear instructions on how to handle themselves and certain situations.

Multi-disciplinary committees are essential to tackling this problem: Risk Management, Human Resources, Legal, Compliance, IT, Finance and every other function in the organization have to work together to come up with a strategy and communicate it. The time for silos has long passed and the interconnectivity and interdependence of business activity and technology demand action and a fresh approach to deal with cyber risk and its many facets.

In this issue, Brian Kelly and John Antonecchia address the subject of insurance for mergers and acquisitions and Richard Paquin from BFL CANADA Consulting Services Inc. discusses health spending accounts.

The classic response of transferring

the burden to the IT team will not do; the risk

is no longer limited to

technology, it has evolved.”

“

SPRING 2015 - Volume 8 Issue 2

RISKS AND BENEFITS

RISK MANAGEMENT AND INSURANCE

Page 2

when the Buyer is looking to collect the indemnity directly from key employees or officers of the company.

Value added of a Buy-Side R&Wi Policy:Enhances protection for breaches in R&W

Extends survival period of R&W

Mitigates indemnity collection risk

Distinguishes your bid

Protects key relationships—on-boarding seller management and shareholders

Sell-Side PolicyThis type of policy states the target company as the Named Insured. It acts as third party coverage for the Seller in cases where there are suspected breaches to the Representations and Warranties set out in the Purchase and Sale agreement. Coverage includes defense cost and can extend to multiplied and consequential damages.

It is often used by private equity organisations selling a portfolio company as it provides immediate access to the sale proceeds with minimal hold-backs and indemnity commitments. A Sell-Side policy is typically more difficult to underwrite since the access to Buyer due diligence reports can be limited and the extension of defense costs and punitive and multiplied damages requires further underwriting.

Value added of a Sell-Side R&Wi Policy:Reduces contingent liabilities

Distributes sale proceeds – re-investment / pay-down existing debt

Protects passive sellers for unintentional breach

Eliminates obstacles for completing the sale

The Numbers• Up to $200 million of capacity is available for any single

transaction. Additional capacity can be accessed on a case-by-case basis.

• Deductible 1% to 3% of the transaction value.

• Premium 2% to 6% of the amount of insurance purchased.

FACILITATING M&A DEALS WITH A REPRESENTATIONS AND WARRANTIES INSURANCE

Representations and Warranties Insurance has been increasingly used as a solution to close mergers and acquisitions deals.

With the increase in volume of private equity deals, changing demographics and a general decrease in risk appetite amongst buyers and sellers, Representations and Warranties insurance (R&WI) is gaining momentum in North America where the aggregate insured limits have doubled over the past two years.

According to the Canadian Private Target M&A Deal Points Study (the Canadian Study1) conducted by the American Bar Association, “69% of deals in Canada have a transaction value below $100 M”. This contrasts with the US market where 63% of deals are above $100 M. Although several insurers continue to underwrite select larger Canadian deals stateside, Canada now has a number of insurers with underwriting authority for all deal sizes.

Although purchasing habits are predominantly expressed on the Buyer side, there are some shared advantages from both a Buyer and a Seller’s perspective.

Buy-Side PolicyThis is a policy where the Buyer is considered the Named Insured. The policy acts as first party coverage to the Buyer in the instance that the Seller breaches the Representations and Warranties set out in the Purchase and Sale agreement.

The policy can be used in situations where:

• a gap exists between the Buyer and the Seller with respect to escrow and indemnity obligations;

• the Buyer wants to ensure that their down-side risk is managed and acting to protect shareholder value;

• the Buyer is looking to distinguish their bid by removing or limiting the escrow and indemnity obligations;

• the credit risk of the Seller can offset the R&WI costs in the deal value;

• the Buyer is on-boarding the shareholders of the target company by effectively removing that awkward moment

1KYTE, K. and DJERRAHIAN, T. (2015, January 19) The Latest on Ca-nadian Private M&A Deal Points, Stikeman Elliot, http://www.canadi-anmandalaw.com/the-latest-on-canadian-private-ma-deal-points/

John AntonecchiaClient ExecutiveBFL CANADA Risk and Insurance Inc. Montreal

Brian J KellyVice President, Team LeaderBFL CANADA Risk and Insurance Inc. Montreal

Volume 8, Issue 2 Page 3

HALIFAX | QUEBEC | MONTREAL | OTTAWA | TORONTO | WINNIPEG | CALGARY | KELOWNA | VANCOUVER

1-866-688-9888

45 Westwind Drive Hammonds Plains, NS  B3Z 1K6 Tel: 902-864-4982 Fax: 902-864-0200

7071 Bayers Road, Suite 320Halifax, NS  B3L 2C2 Tel: 902-471-5000 Fax: 902-404-4344

2590 Laurier Blvd, Suite TBC 600 Quebec City, QC  G1V 4M6 Tel: 418-658-6337 Fax: 418-654-2045

2001 McGill College, Suite 2200 Montreal, QC  H3A 1G1 Tel: 514-843-3632 Fax: 514-843-3842

BFL CANADA Risk and Insurance Inc.

BFL CANADA Risk and Insurance Services Inc.

2685 Queensview Drive, Suite 101 Ottawa, ON  K2B 8K2 Tel: 613-722-7798 Fax: 613-722-7829

181 University Ave., Suite 1700 Toronto, ON  M5H 3M7 Tel: 416-599-5530 Fax: 416-599-5458

BFL CANADA Insurance Services Inc.

175 Carlton St., Suite 205-175 Winnipeg, MB  R3C 3H9 Tel: 204-594-0260 Fax: 204-594-0259

877 Henderson Highway Winnipeg, MB  R2K 2L8 Tel: 204-661-2446 Fax: 204-663-0344

1167 Kensington Crescent NW, Suite 200 Calgary, AB  T2N 1X7 Tel: 403-451-4132 Fax: 403-313-3365

5185 South Ridge Drive Kelowna, BC  V1W 4Z4 Tel: 250-575-2327 Fax: 778-477-0011

1177 West Hastings St., Suite 200 Vancouver, BC  V6E 2K3 Tel: 604-669-9600 Fax: 604-683-9316

Send comments or suggestions to publications@bflcanada.ca

Day 1

• Implicate your broker

• Execute NDA

Day 3-5

• Provide most M&A recent draft Agreement

• Obtain non-binding indications from insurers

Day 5

• Review quotes • Select insurer • Pay insurer due

diligence underwriting fee

Day 5-15

• Access data room • Draft disclosure

schedules • Conference call

with deal team • Negotiate final

terms with insurer

• Policy period generally matches the survival period for the R&W set forth in the acquisition agreement. On a buyer-side policy R&WI, coverage can extend beyond the R&W survival period in the agreement providing an aditional level of comfort.

• Best suited for transactions between $10 million and $500 million

The Process

Sellers Market in 2015?There are several factors that may lead to an increase in Canadian M&A activity for 2015:

• Continued low cost of borrowing combined with low interest rate returns favors acquisition activity;

• Better value for foreign investors due to a weaker Canadian dollar;

• Increased value multiples for sellers caused by growth in Buyer demand. Sell-Side R&WI can help sellers realize the full value of their enterprise, reduce the risk of major and passive shareholders, and provide immediate access to the entire sale proceeds.

For passive or minority shareholders, there is a risk of them being unaware of provisions that may trigger a breach in representations and warranties; this risk is exacerbated if they have “deep pockets”. A key to the Sell-Side Policy, especially for passive shareholders, is the severability provisions, a clause which states that insured parties are severable in their interests and therefore the policy is not void from an intentional breach by another selling stakeholder. The Conduct and Fraud Exclusions can also be negotiated and limited to only apply once a non-appealable final adjudication has been rendered, thereby continuing to provide coverage for defense costs. These are some of the points that would need to be negotiated to ensure optimization in coverage.

As part of a greater financial strategy, the Seller’s decision to purchase the Sell-Side R&WI policy may solely be to gain access to the hold-back and reduce the opportunity cost of having their capital sit in escrow for multiple years. As mentioned, the policy premium is a one-time payment of 2% to 6% of the limit purchased and can apply for the full value – or more – of the hold-back. Immediate access to funds will allow the Seller to invest capital and potentially generate an investment return greater than the cost of the insurance.

Despite its many advantages, R&WI is unfortunately little known and understood. More sellers and buyers would benefit from exploring this avenue. Keep in mind that there is no cost associated with receiving a non-binding premium estimate which can help interested parties assess their comfort level within the context of both the insurance cost and opportunity cost of the transaction.

Page 4 Volume 8, Issue 2

EMPLOYEE BENEFITS

2590 Laurier Blvd, Suite TBC 600 Quebec, QC  G1V 4M6 Tel: 418-658-6337 Fax: 418-654-2045

3448 Stanley St. Montreal, QC  H3A 1R8 Tel: 514-843-3632 Fax: 514-843-3842

181 University Ave., Suite 1700Toronto, ON  M5H 3M7 Tel: 416-599-5530 Fax: 416-599-5458

200 - 1167 Kensington Crescent NWCalgary, AB T2N 1X7 Tel: 403-451-4132Fax: 403-313-3365

BFL CANADA Consulting Services Inc.

WHAT IS A HEALTH SPENDING ACCOUNT (HSA)?

Richard PaquinAdvisor in group-insurance plansBFL CANADA Consulting Services Inc. Montreal

As you all know, benefits, which usually include a group insurance plan, represent a big chunk of the total payroll cost assumed by employees. However, you might also have realized that group insurance plans don’t always meet employees’ expectations. How can an employer rectify the situation without increasing the costs associated with the program in place?

With a bit of creativity, the organization can improve the accessibility or the quality of the existing benefits by considering the following solution:

• Setting up a health spending account (HSA) and offering employees more flexibility as to the customization of their health and dental care options.

How does an HSA work?• A “spending account”, which generally includes a yearly

lump sum, has to be created for every employee. He or she can use the amount to pay for any kind of service defined as a “medical expense” by the Income Tax Act (ex: deductibles and co-payments, prescription drugs, dental care, eye care, massotherapy and other paramedical services).

• HSA are usually provided complementarily to the existing group insurance plan. Employees in need of services that are not included in the group plan in force may want to use a HSA.

• Once the HSA runs out of funds, the beneficiary needs to wait for its replenishment at the beginning of the next fiscal year before using it again.

• The money deposited in the HSA is not considered taxable income (except in Quebec). However, in order to remain that way, the annual balance in an employee’s HSA can

only be transferred to the year following. After this second year, the amount is lost if not spent.

• The allotted amount is normally determined and paid in full by the employer. Moreover, it can be modulated depending on the status (“single” or “family”) of the employee.

Simplicity of useJust as with any bank account, the employee receives, with the HSA reimbursement, a billing statement specifying:

• The amount reimbursed by the HSA;• The balance remaining after the transaction.

Coordination of benefitsIn cases where the insured or his or her spouse is covered by another plan, the benefits application must first be sent to the other insurer. Once the benefit has been determined in accordance with the other coverage, the participant’s HSA can reimburse the remaining amount.

In conclusionA HSA can help you contemplate a realistic solution to enhancing the coverage offered to your employees and better responding to their needs ans expectations – be they from any age range – while keeping your insurance costs under control.