No-Seller Indemnity RWI Transactions Increasingly Used with M&As

As we discussed in a previous article, Representations & Warranties Insurance (RWI) is a popular policy purchased in Mergers & Acquisition (M&A) transactions. RWI provides protection against financial losses, including the expenses involved in defending claims for certain unintentional and unknown breaches of the seller’s representations and warranties made in an M&A purchase agreement. Examples of representations include: authority/authorization; ownership; financial information; and other matters regarding the operation of the business such as intellectual property, environmental, employee benefits, and so on. 

Private equity sponsors and strategic acquirers in M&As of privately held companies as well as private equity sponsors exiting their investment typically purchase RWI. According to an article in the Harvard Law School Forum on Corporate Governance & Regulation, the use of RWI has surged dramatically in the U.S. since 2015. In fact, RWI is now extremely common in deals involving private targets.

A typical RWI policy offers limits of 10% (it can be lower or higher) of the enterprise value and includes a deductible (retention) of 1% of the purchase price of the company. Premiums are typically 2.75% to 3.25% of the limit purchased. Historically, the RWI was structured so that the buyer and seller split the 1% retention, as insurers wanted the transaction negotiations to be balanced and for the seller to have skin in the game. The seller’s portion (1/2%) was typically placed in escrow and funded from the purchase price proceeds. 

Recently, particularly in the current seller’s market, No-Seller Indemnity RWI has become increasingly more popular in M&As where the seller does not share in the policy’s retention. Sellers want a clean exit after the M&A is completed and are not looking to split the 1% retention and tie up any money in escrow. In this case, the buyer takes full responsibility for the retention.

A No-Seller Indemnity R&W policy works for both the buyer and seller. Buyers can use RWI to distinguish themselves during the bidding process and shorten the negotiation process, which can add to their competitiveness. Sellers can use RWI to attract the best offers by maximizing indemnification. 

Owens Group has the experience and market access to provide RWI for a broad range of M&As, including providing No-Seller Indemnity policies. For more information, please contact Joe Ehrlich at 201-408-3512, or Dorene Stockman at 201-408-3504. 

Sources: Harvard Law School Forum on Corporate Governance & Regulation, Insurance Business Magazine, Forbes, Goodwin Law