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ⓒ DLA Piper LLP
TRANSACTIONAL INSURANCE
Stronger Offers, Faster Deals, and
Bridging Gaps
Louis Lehot
DLA Piper LLP (US)
November 22, 2016
ⓒ DLA Piper LLP
AGENDA
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M&A trends
Transaction insurance in M&A – fast facts
Why transactional insurance?
The deal market and the rise of insurance
Growth in the use of rep & warranty insurance, or RWI
Rise of the strategics
Transactional insurance = deal risk transfer
Types of transactional insurance
Advantages and disadvantages for buyers and sellers
What is NOT typically insurable
Coverage cost
Policy coverage
How RWI impacts deal terms
Underwriting process
After the deal
Claims by type of breach
RWI market trends
Experience exchange – Q&A
ⓒ DLA Piper LLP
ABOUT YOUR SPEAKER…
Louis Lehot
Louis Lehot's corporate, securities and M&A law practice focuses on
advising public and large private companies and their financial sponsors in
mergers, acquisitions, dispositions, spinoffs and joint ventures, as well as
corporate governance and securities law compliance matters.
Louis regularly represents US and non-US registrants before the SEC,
FINRA, NYSE and NASDAQ.
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Louis Lehot Partner, Silicon Valley
T: +1 650 833 2330
M: +1 650 796 7280
ⓒ DLA Piper LLP
THE DEAL MARKET AND THE RISE OF
R&W INSURANCE
Investment Trends
Easier and More Cash for Deals
• Strong economy, low borrowing cost, solid investment returns
• High stock prices and cash on the books
• Increasing non-public investment opportunities
Deal Trends
• High stock prices and cash on the books
• Increasing non-public investment opportunities
Insurance Trends
• Seasoned products and claims record
• Inexpensive capital, relatively flat industry
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ⓒ DLA Piper LLP
2016 DEAL FLOW IS STILL STRONG
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ⓒ DLA Piper LLP
FAST FACTS
Transferring risks to an insurer that
otherwise would be borne by a Buyer or
Seller
Approx. 10% of M&A transactions in Europe
and approx. 20% in the US
Over 90% Buyer Side Policies
Seller Side Flips
Cover range from 100% down to 2% of the
purchase price
Cover decreasing with deal size (≤€25m
100% to 52%; €25-50m - 55% to 13%; €50-
100m - 33% to 15%; >€100m - 26% to 2%)
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ⓒ DLA Piper LLP
WHY R&W INSURANCE?
Frees up cash
"Clean exit" for the Seller(s)
Post-Closing protection for the buyer
Shortens negotiations by managing risk transfer
Makes deals happen
Limited seller creditworthiness
Competitive advantage to positioning of offer
Helps to retain the seller's goodwill
Protection of family assets
Better conditions for Buyers and Sellers
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ⓒ DLA Piper LLP
GROWTH IN USE OF R&W INSURANCE
Marsh – Limits Placed by Year DLA Piper Insured Deals
(2015, global)
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ⓒ DLA Piper LLP
RISE OF THE STRATEGICS
Formerly a seller problem
Strategics introduced to it in competitive deal situations
U.S.: Strategics are around 40% of the buy-side market
U.S.: Strategics are requiring on more spins/asset sales
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ⓒ DLA Piper LLP
TRANSACTIONAL INSURANCE =
DEAL RISK TRANSFER
Insurer assumes deal risks that would otherwise fall on
Buyer or Seller
Examples:
• Risks of breach
• Tax indemnity
• Survival periods
• Certainty of collection
Insurers are willing to do this because:
• Diverse and large portfolio of risks
• Claims paid above retention are rare
• Product is profitable
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ⓒ DLA Piper LLP
TYPES OF
TRANSACTIONAL INSURANCE
Representations and Warranty Insurance
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Buyer-Side Policy
- Insurance acts as a substitute for
sellers’ indemnification obligations
under acquisition agreement
- Can enhance indemnification
terms set out in acquisition
agreement
Extended survival periods
Increased cap
- Can cover fraud by sellers
Seller-Side Policy
- Sellers backstop their potential
indemnification obligations under
acquisition agreement
- Mirrors representations and
warranties set out in acquisition
agreement
- Knowledge between sponsors
and management sellers can be
severed
- Typically excludes fraud by the
sellers
ⓒ DLA Piper LLP
BUYER SIDE:
TRADITIONAL DEAL VS INSURED DEAL GENERALLY
Insured Deal:
Seller Cash/Cap at
1% Escrow
1% Deductible
Escrow 1%
Buyer’s Insurance
2% Retention
Insurance
Coverage
(3/6 years) 10%
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1% Deductible
Seller
Escrow
(12-18 months)
10%
Traditional Deal
Seller Cap 100%
Seller Cash 10%
90%
100%
EV Indemnity
ⓒ DLA Piper LLP
SELLER SIDE:
SELLER HAS NERVOUS SHAREHOLDERS
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Deal
90%
10%
Escrow
100% Cap
Seller EV
Indemnity
Seller Side Insurance
Example #1
Retention
90%
10%
Seller Insurance
Seller Insurance
OR
Retention 2%
98%
Seller Side Insurance
Example #2
ⓒ DLA Piper LLP
BUYER SIDE:
IP-CENTRIC DEAL, SELLER LOVES PRICE
Buyer pays for first 15% of limits, Seller paid for half of remaining 25% as PP deduction.
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1% Escrow
Deal
Seller Cap at 1%
10% Escrow
Offer
40% 50%
EV Seller IP
Indemnity
1.5%
40%
Buyer’s Insurance
Retention
Insurance
All Reps
ⓒ DLA Piper LLP
BUYER SIDE:
POTENTIAL ADVERSE TAX CONSEQUENCE
Deal
Seller Cap at 2%
1% Tipping Basket
Escrow 2%
Seller paid 100% of premium as a PP deduction
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Buyer’s Insurance
Seller Pays Premium
2% Retention
98%
Insurance
Coverage at EV (or
amount of issue)
No Deal – Remote issue,
but with huge potential
consequences
ⓒ DLA Piper LLP
BUYER HAS LEVERAGE BUT SELLER ISSUES =
POLICY EXCLUSIONS
Deal
1% Tipping Basket
General Escrow 5%
Insurance
2% Retention
Insurance
Coverage 20%
General Escrow 5%
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Special Escrow 5%
ⓒ DLA Piper LLP
BUYER SIDE POLICY –
BUYER ADVANTAGES
Competitive advantage to positioning of offer
Buyer-favorable reps
Longer survival period
Protect relationship with key sellers
Easier pursuit of assets for breach/loss
Insurer has reputational risk that seller may not
Insurer may have additional legal duties of good faith that
seller does not have to buyer
Diligence savings?
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ⓒ DLA Piper LLP
BUYER-SIDE POLICY:
SELLER ADVANTAGES
Smaller (or even no) escrow
Shorter escrow
Buyer may be willing to assume additional (insurable) deal
risks and not deduct them from purchase price
Non-recourse deals
Representations and warranties expire at closing
Nonmaterial breaches prior to closing nonactionable
Only recourse against seller is for fraud
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ⓒ DLA Piper LLP
SELLER-SIDE POLICY:
SELLER ADVANTAGES
May allow seller to provide buyer-favorable reps in deal to
obtain a higher purchase price that more than offsets policy
premium
Deal proceeds may be distributed sooner or booked differently
May make it easier to get consents, especially non-insiders
Peace of mind for individual sellers or family sellers (vs. PE
sellers or others with diversified deal portfolios or higher risk
tolerance).
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ⓒ DLA Piper LLP
SELLER-SIDE POLICY:
BUYER ADVANTAGES
While no direct connection with insurer (at least initially), Seller
will now have a potential source of funds to pay indemnity
demand.
Seller may be able to absorb more adverse deal terms without
upward purchase price adjustment.
Potential disadvantage: Seller will have potential war chest to
resist indemnification demand.
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ⓒ DLA Piper LLP
WHAT ISN’T TYPICALLY INSURABLE
Typically Excluded
Deal Team Actual Knowledge
Defined benefit plan underwriting
NOLs carry forward
Covenants
Punitive damages
Working capital or other purchase price adjustments
10b-5 representation
Heightened Underwriting (Deal Specific)
Environmental
Cyberliability and Privacy
Wage & Hour
Other Insurance Solutions
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ⓒ DLA Piper LLP
COVERAGE COST
Varies by product, market, and limits
1. Premium
Generally, for 10% EV limits:
3-4% of limit purchased for US Buyer-side R&W
1-2% of limit purchased UK Buyer-side
Higher limits = lower rate
2. Broker Commission: 15% +/- of premium inclusive
3. Underwriting Fee
4. Premium Taxes
Who pays? – Premium can be allocated between parties.
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ⓒ DLA Piper LLP
POLICY COVERAGE
- Retention (typically 1 to 2% of purchase price)
- Policy limit tracks indemnity cap under purchase agreement (plus some additional amount to cover Seller’s defense costs)
- Effective date of policy is at closing, but can be bound at signing
- Generally, no coverage for claims arising between signing and closing
- Reduction of covered losses for:
Insurance recoveries
Third party recoveries
Tax benefits
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ⓒ DLA Piper LLP
HOW R&W INSURANCE IMPACTS
DEAL TERMS
Representations and Warranties
-R&W policy generally follows reps and warranties in purchase agreement
(with any gaps in the form of exclusions or qualifications in the policy).
Indemnification Provisions
-Escrow / Indemnity
Insurers generally want at least .75 % of transaction value as seller cap in escrow
$0 escrow, no-indemnity deals are possible
-Survival Periods in Insurance
Fundamental representations up to 6 years survival period
General representations up to 3 years survival period
-Limitation of loss
Consequential damages, “fraud” exception to cap
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ⓒ DLA Piper LLP
UNDERWRITING PROCESS
Retain reputable broker
National and regional brokers
Niche brokers
Timing
Optimally as early in the process as possible
Typically about two-three weeks before signing
As little as four business days prior to signing
Seller bid package might include quotes
Exclusivity requirement
Underwriting Process
Diligence supplied, diligence call
No Claims Declarations
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ⓒ DLA Piper LLP
AFTER THE DEAL
Claims
Types of Claims
Recent Claim Examples:
Data breach
Financials
IP
Policies Typically Transferable
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ⓒ DLA Piper LLP
CLAIMS BY TYPE OF BREACH
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% of Claims by Type of Warranty Breach
0%
4%
8%
12%
16%
20%
ⓒ DLA Piper LLP
R&W INSURANCE MARKET TRENDS
US
Hot M&A Market
Low to no escrow
Shorter survival periods for reps and warranties
Softer Transactional Insurance Market
Smaller and larger deals getting insured
Increasing demands by sellers in auctions
Increasing use of tax insurance
Europe
Growth in number of European jurisdictions but particularly UK, Germany and Nordics.
Warranty de-minimus/excess decreasing - now often 0.5%-1%
Premiums lowering now 1-1.5% but probably more exclusion in policies/lower scope of cover compared to the US
Coverage that can be purchased in the UK market has increased to £400-500m
Latin America
Use by US Buyers of assets in Latin American companies
Protection against political risks
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ⓒ DLA Piper LLP
EXPERIENCE EXCHANGE: Q&A
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ⓒ DLA Piper LLP
Louis advises multinational companies in both public and private mergers and acquisitions,
joint ventures, strategic alliances, strategic and venture investments, SEC compliance,
financial reporting and corporate governance. Bicultural and with vast international
experience, Louis focuses his practice on representing US and non-US companies in cross-
border transactions.
Louis’ recent public company clients have included CBRE, CHC Helicopter, Juniper
Networks, MMI Technologies, Model N, Penn National Gaming, Seagate, Softbank,
STMicroelectronics and Tecan, while recent private company clients have included
AdKnowledge, Inc., AdoTube (acquired by Exponential Interactive), Binatone Global (buyer of
Motorola Mobility’s companion products business), CheckALT (buyer of Diebold's check
processing business and Klik Technologies from Union Bank), Cardioxyl (acquired by Bristol
Myers Squibb), Docea Power (acquired by Intel), Double Beam (acquired by Verifone),
Kerensen Consulting (acquired by salesforce.com), MetricTest (acquired by Microlease plc),
StackStorm (acquired by Brocade) and Tuplejump (acquired).
Louis has focused a significant amount of his practice on representing Korean
multinationals doing business globally, including affiliates of Hanwha, Hanwha Q Cells,
KEPCO, POSCO, Samsung and SK Planet, among others.
Louis has been consistently rated as a leading lawyer by Chambers & Partners and by peer-
reviewed legal guides, receiving praise for the high quality of his advice, his responsiveness
and passion for his clients. Louis was ranked a Silicon Valley "Power Player" attorney by
AlwaysOn.
With the benefit of deep deal and life experience in the US, UK, Europe and Asia, Louis
“cross[es] over into the international space and is easy to work with,” according to leading
peer-reviewed publication Chambers & Partners.
Before returning to Silicon Valley in 2005, Louis practiced in New York, London and Paris. He
writes and speaks prolifically on corporate, securities and technology law matters.
LOUIS LEHOT
Louis Lehot Partner, Silicon Valley
T: +1 650 833 2330
M: +1 650 796 7280
Education
Boston College Law School J.D.
Georgetown University B.S.
Institut d'Etudes Politiques de
Strasbourg (France) C.E.P.
Admissions
California
New York
''Louis Lehot of DLA Piper
is praised by clients
for the high quality
of his advice on IPOs...''
"He can cross over into the
international space and is
easy to work with."
Chambers & Partners USA
31
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