How SPAs developed with the use of W&I insurance

AND HOW GLOBAL BEST PRACTICES MAY IMPACT DUTCH SPAS

The first M&A insurance solutions appeared in the late 1990’s, in the form of sell-side W&I insurance policies, specifically designed for family or private equity exits. The share purchase agreements (SPA) did not contain specific clauses to acknowledge or manage the use of W&I insurance, but rather, it was simply a case of the insured seller notifying the W&I insurer when it received a claim from a buyer.

More recently, the use of W&I insurance in M&A transactions has developed significantly and now the vast majority (99%) of W&I insurance policies are buy-side rather than sell-side. Whilst W&I insurers have become better versed in the way M&A transactions are done, M&A lawyers have also become much more comfortable with the use of W&I insurance in their transactions, and what this means for their template documents. From 2000, the team at Risk Capital Advisors (RCA) has been at the forefront of developing W&I insurance, e.g., non-recourse W&I policies and stapling the W&I policy to auction-draft SPA (sell-buy flip). For more than 20 years, the team at RCA have been advising lawyers how best prepare their transaction documents to maximise the benefits available through the W&I insurance.

The RCA team has also been supporting M&A lawyers in The Netherlands to understand how to use W&I insurance. Whilst many international law firms based in The Netherlands have adopted the full benefits of W&I insurance into their SPA precedents, a number of Dutch SPAs are still drafted with recourse to the seller and/or an escrow as standard. There are, of course, good commercial reasons for a buyer to want to have some seller exposure, but where sellers intend to ‘walkaway’ there is no requirement to offer any seller liability under the SPA. At RCA, we expect to see a change in the way Dutch SPAs are drafted. For instance: • Fully non-recourse SPAs. De minimis, threshold, limit of liability and time period are not needed in the SPA anymore, but rather are set out in the W&I policy, so do not necessarily need to be negotiated between buyer and seller. Non-recourse W&I policies set the seller’s liability to a nominal amount or nothing at all. The only recourse against a seller/warrantor will be in the event of fraud. • Nowadays W&I insurers are fully accepting of a SPA that has no recourse to the seller. This was not always the case but claims experience has shown that there is no discernible difference between having sellers who walk-away completely and those

sellers who have retained some post-closing liability. It does, however, depend on the dynamics of a transaction as to whether a non-recourse SPA would be appropriate; typically, where a private equity seller is disposing of a target by way of a competitive sales process. It remains to be seen whether the current market conditions remain able to support this approach and whether buyers who now have more advantage and may be inclined to insist on some recourse to sellers. Covered (insured) and non-covered (non-insured) warranty claims under the SPA. This allows for the buyer to obtain maximum cover from the W&I insurer, but where a W&I insurer will not cover something - such as a known issue or a warranty out of scope of the due diligence - then the seller retains the liability. This is suboptimal compared with the non-recourse approach where the seller has no liability whatsoever and whilst, in reality, this is often where the parties eventual end up, it is useful to be thinking about categorising claims in this way from the outset. The ‘Knowledge Scrape’ or ‘Awareness Scrape’ originated in the US and has reasonably quickly become available in most of Western Europe. The W&I policy can include a Knowledge Scrape so that the knowledge or awareness qualifications are ignored for the purposes of the W&I policy. This differs to the ‘Materiality Scrape’, which excludes materiality qualifiers in determining the quantum of loss as a result of the breach for the purpose of the W&I policy. The Knowledge Scrape lowers the disclosure burden and can be very useful for management or sellers who are perhaps new to the company and cannot or will not give unqualified warranties. A knowledge scrape is probably most useful where there is some recourse to management or the seller as it really limits the scope for a claim against them. The buyer, in those circumstances, is then required to prove that the sellers were aware of a breach of warranty but did not disclose it, which is a difficult thing to prove. Synthetic tax deeds and warranties. Utilised where a seller is unwilling or unable to provide warranties or a tax indemnity, but the W&I insurer will provide a tax indemnity or warranties via the W&I policy instead. A Synthetic W&I Policy will only be available where there has been thorough due diligence and disclosure exercises, as well as a well populated data room. The most common use for synthetic warranties is an administration or receivership sale process. For a synthetic W&I policy, the warranties are not given by the seller, but instead a synthetic set of warranties is agreed between buyer and the W&I insurer and includes the W&I policy. The wording of the synthetic warranties is therefore not dependent on negotiations between the buyer and the seller.

Over the years, RCA has worked with both M&A lawyers and W&I insurers to ensure that the transaction process, the transaction documentation and the W&I insurance policy interact as smoothly as possible. With 20+ years of hands-on experience, the team RCA is able to deliver practical insurance advice in the complexity of any transaction and the ability to structure insurance solutions that are both legally robust and commercially pragmatic.

Whilst RCA has been working with M&A lawyers and clients in The Netherlands for many years, it has recently launched an office in Amsterdam. This means that RCA is now even better placed to support law firms, Investment funds, M&A professionals and corporate clients in The Netherlands on how best to structuring M&A transactions in a way that maximises the benefits of W&I insurance.