Representations & Warranties Insurance protects against loss arising from a breach of a seller’s representations and warranties made in a merger or acquisition. The insured may be either the seller or the buyer.
The seller-based policy indemnifies a seller who is sued for an alleged breach.
A buyer-based policy allows the buyer to claim proceeds directly under the policy for a breach, however, if there is recourse against an escrow or seller such recourse must be pursued.
The Benefits Provided:
Collection Assured. Even a good deal may lack certainty of collection of indemnity. Whether it is an asset sale by a company being dissolved, a stock sale by retiring owners, a sale by foreign owners or an equity fund that is winding down, a privatization or a sale by a corporate parent that is itself preparing to be acquired, Representations & Warranties Insurance can backstop the representations made.
Avoid Suing Management. In a management buy-out or buy-in transaction, Representations & Warranties Insurance provides an alternative to suing existing management in order to be fully indemnified for a breach.
Bridge the Deal. Whenever an impasse is reached over a desired escrow amount, indemnity ceiling, or purchase price adjustment in light of a threatened or existing adverse condition or contingency, Representations & Warranties Insurance can “bridge” the deal. The “bridge” may even yield a profit to the buyer, who agrees to reduce the escrow amount and/or indemnity ceiling in exchange for a reduction in the purchase price that exceeds the premium.
Enhanced Bid. In the context of an auction sale or asset sale from a bankruptcy estate, superior terms can often make the differences in a deal. Reduced escrow and indemnity ceilings (supported by Representations & Warranties Insurance) may enhance a bid.
Facilitate Acquisition Lending and Resale. At no additional cost, Representations & Warranties Insurance can cover lenders and subsequent assignees.
Maximize ROI. An equity fund seeking to maximize the amount and minimize the time incurred in distributing sale proceeds from a M&A transaction can use Seller-based Representations & Warranties Insurance to avoid internal reserves and/or can reduce escrow and indemnity obligations by insisting that a buyer obtain Representations & Warranties Insurance.
Seller’s and Buyer’s Sleep Insurance. No post-closing budget surprises.