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Mor

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LLP

MAJOR LEGAL TRENDS FOR 2018JEGI MEDIA & TECHNOLOGY CONFERENCERobert W. DickeyJanuary 18, 2018

REPRESENTATION AND WARRANTY INSURANCE

“A lot of times people don’t know what they want until you show it to them.”

- Steve Jobs

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Where We Started

• Representation and Warranty Insurance (RWI) originally developed in 1999

• For over a decade, it was almost a total nonfactor in M&A transactions

• Started to get traction in early to middle part of this decade• At this conference in 2015, we suggested that it might

become the new “staple”

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Where We Are Now

• RWI featured in 29% of private company acquisitions in most recent ABA study

• At least 19 primary RWI underwriters• Competition has driven pricing down• The perception that insurers are unlikely to pay on claims

has faded• What is covered?

– Representations and warranties, not covenants– Traditional exclusions (e.g., tax; environmental) have narrowed– Concept of Seller “skin in the game” is less important– Buyer policies typically provide broader coverage (e.g., cover Seller

fraud; longer survival periods)

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Benefits for Buyers

• Increase amount or duration of post-closing recourse• Reduce or eliminate Seller credit risk• Provide recourse when no Seller indemnification is possible• Distinguish bid in auction• Protect key relationships (e.g., management; provider of

transition services)

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• Reduce or eliminate post-closing contingent liabilities• Facilitate distribution of sale proceeds• Protect passive Sellers• Maximize potential offers by providing Buyers with

meaningful post-closing recourse• Propose RWI as sole post-closing recourse in auction

processes

Benefits for Sellers

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Process, Timing, and Costs

• Soliciting quotes, usually working with insurance broker, is first step

• No longer viewed as slowing a transaction process – 10-20 days from quote to binder

• Insurer will require access to due diligence materials and reports, deal documents, and deal teams

• Pricing generally 3% or less of coverage limits• Retention amounts generally 1% or less of deal value

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Pressure Points and Traps for the Unwary

• Exclusions• Procedures• Interim period coverage• Interplay with other forms of Buyer recourse

– Retention erosion/drop-down– Definition of loss– Materiality scrape– Sandbagging

• RWI documents need to be negotiated in order to harmonize them with the other transaction documents

• The presence of RWI in a transaction does not obviate the need to be thoughtful about post-closing recourse issues

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THANK YOU© 2018 Morgan, Lewis & Bockius LLP© 2018 Morgan Lewis Stamford LLC© 2018 Morgan, Lewis & Bockius UK LLP

Morgan, Lewis & Bockius UK LLP is a limited liability partnership registered in England and Wales under number OC378797 and is a law firm authorised and regulated by the Solicitors Regulation Authority. The SRA authorisation number is 615176.

Our Beijing and Shanghai offices operate as representative offices of Morgan, Lewis & Bockius LLP. In Hong Kong, Morgan Lewis operates through Morgan, Lewis & Bockius, which is a separate Hong Kong general partnership registered with The Law Society of Hong Kong as a registered foreign law firm operating in Association with Luk & Partners.

This material is provided for your convenience and does not constitute legal advice or create an attorney-client relationship. Prior results do not guarantee similar outcomes. Attorney Advertising.

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