Deal lawyers reported an increase in the use of representations and warranties insurance (RWI) in agreements over the past three years in Bloomberg Law’s most recent State of Practice survey. This corresponds with the upward trend I examined earlier this year on the use of RWI as a risk-allocation tool and its resulting presence in mergers and acquisitions agreements.
A deeper dive into the survey’s results shows that the prevalence of RWI in M&A deals is dominated by a select few deal types and, of the deals using RWI, a specific combination of entities.
RWI Use Continues to Increase
Sixty percent of M&A lawyers said that they saw an increase in the use of RWI in the past three years, 38% said the use stayed the same, and only 2% saw a decrease.
And M&A lawyers overwhelmingly picked three deal types that involved RWI the most often: asset purchase (31% of respondents), controlling stake stock or equity purchase (24%), and merger (22%). The remaining four deal types each came in at 10% or less.
It makes sense that asset purchases top the list: At its most basic, the acquisition of a company’s assets also includes the liabilities tied to those assets. Controlling-stake stock or equity purchases and mergers likely round out the top three because they also involve the acquisition of liabilities by nature of their deal structure. RWI can help offer some protection against breaches of representations and warranties from undisclosed liabilities.
RWI Benefits Private Deal Entities
The survey dug a little deeper into the particulars of deals involving RWI over the past 12 months and asked attorneys about the entities involved in those transactions. Most respondents (53%) said that these deals involved all private entities.
Deals with “public buyer, private seller, private target” came in a far-off second place with 12%, and “private buyer, private seller/target” came in third place with 11%.
These results align with RWI’s familiar use in deals: RWI is known for its extensive use in the acquisition of private company targets or their assets. There’s often a lot of negotiation regarding post-closing indemnification, and RWI can help streamline the drafting of an M&A agreement for a private target company by helping to eliminate possible disputes over indemnification and decreasing the amount of funds placed in escrow. An RWI policy would provide the buyer protection against certain breaches of the target’s representations and warranties that it would have otherwise sought via indemnification (and the related escrow amount)—sometimes with a longer survival period than may have been possible without RWI coverage.
Attorneys working on cross-border M&A deals similarly use RWI as a deal protection device, as Bloomberg Law legal analyst Abena Opong-Fosu wrote about in September.
Public target companies, on the other hand, typically make less-extensive representations and warranties than private ones, since public companies disclose more information in the reports filed with the SEC, and purchase agreements for transactions between public companies often do not contain indemnification provisions.
The use of RWI in M&A transactions isn’t going anywhere just yet. Asset purchases and deals involving private entities will continue to be the most popular deal types and entity combinations for RWI use, given the benefits it can offer parties in those transactions.
RWI can be used in public company deals, but I think the slower M&A market and the narrower scope of representations and warranties that may be covered by an RWI policy in public company deals (e.g., due to the common use of Material Adverse Effect qualifiers) will keep the primary use of RWI with private company transactions and mitigating risks associated with those private company assets.
Bloomberg Law subscribers can find related content on our Surveys, Reports & Data Analysis page. Bloomberg Law subscribers also can find related mergers and acquisitions content on our M&A Deal Analytics resource, as well as RWI information in our Practical Guidance on Merger Reps & Warranties and Practical Guidance on Merger Covenants documents.
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