Securing a Clean Exit L
Lawyer Perspective
Simon Hughes
European Head of Private Equity Partner, London
simon.hughes@
bakermckenzie.com
Securing a clean exit is the age-old saga for private equity houses. And, over the years, the market has responded with various techniques to help private equity funds achieve it. Typically, those have included: not offering buyers any business warranties; for management only to provide business warranties; or for business warranty protection to be limited to a small escrow. One technique that was less widely used, was warranty and indemnity insurance.
Head of Baker & McKenzie’s European Private Equity Group and Partner in the Firm’s Corporate Group in London. Over 20 years experience in advising clients on private equity and M&A transactions. Simon is primarily focused on leveraged buyouts, investments, acquisitions and disposals for UK and international clients. A large proportion of Simon’s work is in relation to cross border or multi-country transactions. He has significant experience in the telecoms and healthcare sectors.
Warranty and indemnity (W&I) coverage has been available in the London market for many years but deal-makers trying to access the product historically complained that it was too expensive and cumbersome to arrange. But, in recent times, the W&I product has undergone a number of material changes. In particular:
n In Western European buy-outs, premiums are now regularly less than 1% of the amount insured. This makes the pricing of the product very attractive
n Whilst the excess continues to remain around 1% of the EV, in some transactions it is possible to reduce this as part of the premium negotiations
n The process for arranging insurance has significantly improved. It is faster and can dovetail with the transaction timetable. Brokers and insurance houses now have City-trained M&A specialists – often ex-lawyers and bankers – who understand the deal environment and the deal timetable
n It is possible to extend the “warranty” coverage on a buy-side policy (vis-à-vis the insurer) beyond that agreed with the seller in the SPA by, for example, removing knowledge qualifiers to certain warranties, extending time periods in which claims need to be brought, or reducing the de minimis and baskets.
In light of these changes deal makers now view W&I coverage as a more commercial option. PE deals, in Western Europe and Australia, are increasingly being closed with W&I in place.
Requirements for a policy To obtain a W&I policy, the insured will need to satisfy the insurers of the following:
n Warrantors prepared to give a set of business warranties – typically management
n Arms length transaction with reputable advisors on each side
n A “proper” due diligence and disclosure process, of which the insurer(s) have had sight
n Insurable business sector – certain insurers are more cautious of perceived “high risk” businesses
n Transaction documents governed by English law or another legal system perceived by the insurance
n Market to be “reputable”.
Exclusions The policy broadly covers the warranty protection provided in the SPA up to the insured amount and subject to the excess. But areas that are commonly not covered are:
n Matters known by the insured’s deal team when the policy is taken out
n Fraud and deliberate non-disclosure by the insured
n Certain fines and penalties e.g. criminal fines n Certain environmental claims, e.g. relating to asbestos
n Pension underfunding n Tax “avoidance” n Forward looking warranties e.g. ability to collect debts post completion
Warranty and indemnity insurance is rapidly becoming an effective tool in bridging the gap between private equity sellers looking for a clean exit and buyers seeking warranty protection.
40 Author Viewpoint
Risk and Insurance in Private Equity and M&A 2012/13
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