SRS Acquiom recently published its first Buy-Side Representations and Warranties Insurance (RWI) Deal Terms Study. The study analyzed the terms of 588 private-target acquisitions that closed between 2015 and 2017, the majority of which are not required to be publicly disclosed. As Canadian M&A deals continue to use RWI at an increasing pace, insights from firms such as SRS Acquiom offer valuable perspective on popular terms in RWI covered deals. Some of the study’s key findings are outlined below.
- Escrow. One of the most pronounced effects of RWI coverage is the reduction in the amount of the purchase price to be held in escrow in satisfaction of potential indemnity obligations. In deals that were covered by RWI, the median escrow size is 1% of the purchase price compared to a median escrow size of 10% of other deals.
- Purchase price adjustment. Deals covered by RWI were very likely (to the tune of nearly 90%) to include a purchase price adjustment mechanism. This is a significant increase over the 71% of other deals that did not contain a purchase price adjustment mechanism. The purchase price adjustment mechanism was most often tied to an explicit working capital adjustment process
Qualifiers and Individual Representations and Warranties
- Sandbagging. In deals that were covered by buy-side RWI, parties were over twice as likely to agree to anti-sandbagging provisions. Additionally, only 32% of deals contained pro-sandbagging provisions which is a significant reduction compared to 56% of deals that were not reported to be covered.
- Materiality. While buy-side RWI coverage did not significantly change the how often materiality scrapes were used, it did have an impact on the language of materiality scrapes. In deals that were covered by RWI, materiality was far more likely to be relevant in determining both whether a breach exists and determining damage amounts. There was a corresponding decrease in the use of the materiality qualifier for determining damages only in covered deals.
- Offset of indemnity. Deals that were covered by RWI were significantly more likely to have an provision expressly prohibiting the offset of indemnity claims against future earnout payments. In any case, approximately 6% of deals with buy-side RWI coverage were silent on this point, compared to 10% of deals where no RWI was reported.
- Baskets. Deals with buy-side RWI coverage showed a strong preference towards a simple deductible basket with 67% of covered deals having that provision. The popularity of deductible baskets comes at the expense of first dollar baskets which were seen in 22% of covered deals, down from 56% of non-covered deals.
The author would like to thank Daniel Weiss, articling student, for his assistance in preparing this legal update.
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