InHouse Counsel Masterclass Corporate MA Trends Tuesday 18

In-House Counsel Masterclass: Corporate M&A Trends Tuesday 18 June 2019 Dublin London New York Francisco San Franscisco

Welcome David O’Donnell, Partner & Head of Corporate Mason Hayes & Curran Dublin London New York Francisco San Franscisco

Warranty and Indemnity Insurance William Dillon-Leetch, Partner Mason Hayes & Curran Dublin London New York Francisco San Franscisco

W&I Insurance A refresh on some fundamentals • Insurance provided to either a Buyer or a Seller for loss arising out of a breach of a representation, warranty or indemnity in context of an acquisition • Covers unknown and unforeseen risks only (some exceptions) • Buy-side policy - No requirement to pursue the Seller before claiming under the policy • Importance of due diligence and proper disclosure exercise Dublin London New York Francisco San Franscisco

History and ‘Coming of Age’ Then and now Then Now • Introduced to market 30 years ago, originating in US and UK • Typically sell-side policy • Initially highly-priced with questionable coverage • Small number of insurers • Lengthy underwriting process tending to delay transaction • Reasonably priced and fast track underwriting process in “deal time” • Typically buy-side policy • Specific, tailored coverage • Multiple, specialised insurers • Market capacity +€ 300 m per transaction Dublin London New York Francisco San Franscisco

Buy-Side vs Sell-Side - Strategic Uses Buy-Side Policy Sell-Side Policy Prevalence More common (circa. 95% of policies) Less common (circa. 5% of policies) Insured Party Buyer is covered against losses with direct recourse to insurer Seller is covered against losses (and the buyer can be named as the loss payee) Strategic use • Corporate Auctions – Bidders can differentiate bids by using W&I • Removes obligation to provision for residual liabilities • Assuages concern for buyer as to strength of covenant of a seller • Frees up sale proceeds for reinvestment/return to investors • Avoids requirement for escrow/holdback • Generally kept confidential from Buyer • Protects relationship where ‘management warrantors’ give warranties, but remain in place post-completion • International deal where Buyer not confident of bringing claim in local jurisdiction Dublin London New York Francisco San Franscisco

Typical exclusions Exclusion Commentary Known Issues Significant gap in cover in two key areas: • Liability for matters known to Buyer are excluded from W&I cover • Claims under Tax Deed are qualified by Buyer’s knowledge Policy Excess Also known as Retention/Deductible/Attachment Point Fixed amount of insured loss that the Seller/Insured must suffer before policy will respond (generally non-tipping) Split Signing and Completion No cover for defects arising in the period between signing and completion Consequential Loss Standard exclusion Categories of unknown risks typically excluded Condition of Assets, GDPR, Pre-/Post-Completion Reorganisations, Product Liability, Bribery/Corruption, Pollution/Contamination, certain tax issues (transfer pricing, secondary tax liability, availability/valuation of tax losses, etc), holiday pay, pension underfunding, criminal fines/penalties Dublin London New York Francisco San Franscisco

Recent innovations and examples of enhancements Quantum Warranties Tax Deed No Excess with Nil Seller Recourse ‘Knowledge Scrape’ Specific Indemnity Policies Policy can disapply ‘so far as the Seller/Warrantor is aware’ qualifiers Tax issues too difficult to underwrite can now be insured under separate ‘specific indemnity’ policies (transfer pricing, tax residence, identified issues ) Definition of “Damages” and “Losses” Disclosure of Data Room/DD Reports Knowledge qualifying claims under Tax Deed Policy can apply indemnity measure of damages and can include consequential loss Policy can deem these items not to be disclosed Policy can disapply knowledge qualifier to Tax Deed and also disclosure of tax issues identified in DD Report Insurers willing to underwrite on basis of nil seller recourse in certain circumstances ‘first euro’ basis for recovery Time Periods/Quantum Defects arising between signing and completion can Policy can extend time periods be covered and quantum/insurance limit These can be covered but are for claims under warranties expensive, typically 10 -15% additional premium per week Dublin London New York Synthetic Warranties & Tax Deed Provided by Insurer and not the Seller/Warrantors, outside of the SPA Francisco San Franscisco

Underwriting Process Phase 1 – Non-Binding Indications Action Description Documents Timing Kick-Off Call • Broker briefed on transaction • rationale/motivation for using W&I policy • policy parameters (cap, excess, insurance solutions available, etc. ) Broker NDA/Confidentiality Agreement Day 1 Broker Analysis • • Review of deal structure and transaction documents Broker formulates strategy for going to market of insurers Draft SPA & Tax Deed, IM, Group Structure & Accounts Day 2 Go to Market • • Broker Summary circulated to insurers/underwriters Request for non-binding indications (NBIs) of key terms, including coverage, pricing and excess Broker Summary (plus supporting documents above) Day 3 to 4 NBI/Market Feedback Report • • Broker collates NBIs into Market Feedback Report sets out insurance options and recommendations (incl. analysis of price, coverage terms, execution risk etc) NBIs & Market Feedback Report Day 5 Client Engagement • Discuss Market Feedback Report with client and select primary insurer to engage in policy negotiations. Client enters expense agreement to cover underwriting expenses (e. g. DD expenses) (sometimes waived) Expense agreement Day 6 • Dublin London New York Francisco San Franscisco

Underwriting Process Phase 2 – Underwriting and Policy Negotiation Action Description Documents Timing Insurers Underwriting Review • Broker engages selected insurer(s) to commence underwriting Insurers and their external counsel review DD reports and prepare underwriting questions Written underwriting questions forwarded by insurer and responded to by client VDR Access, Transaction Documents, DD Reports, Mgmt Accounts, HH Letters Day 7 to 14 Conference call between insurers and Buyer’s deal team/advisors Discuss underwriting questions and any outstanding concerns insurers have around the transaction DD Reports Day 15 Insurers issue first draft of a policy following underwriting call Brokers and lawyers mark-up policy to ensure it responds to loss under Transaction Documents Try to broaden coverage and include enhancements Draft Policy Day 16 • • Underwriting Call • • • Policy Negotiation • • Policy Inception and Signing • • Once policy is fully negotiated, coverage will be put in place Final Policy and at time agreed in transaction documents, usually on signing No Claims No claims declaration will be required on behalf of Insured Declaration Dublin London New York Francisco San Franscisco Day 17

Making a Warranty Claim Hurdle Policy Excess exceeded? YES Breach of an Insured Warranty is clearly identified? YES Policy has not excluded the issue leading to the breach? YES The matter was not disclosed to the Insured on inception YES The Insured can show a financial loss is caused by the breach of warranty YES CLAIM IS PAID WHEN ALL CONDITIONS ARE MET • Credibility of W&I policies? • Establishing liability is quick, but calculation/agreement on quantum of loss takes time • Insurers will investigate with involvement of experts • Involve W&I Broker when making a claim Dublin London New York Francisco San Franscisco

Key Takeaways – W&I Insurance • W&I claims on the rise: sophisticated, repeat Buyers more familiar with product and understand when they can/cannot claim • the bigger the transaction, the more likely a claim • over 50% of claims made in first 12 months • Synthetic Warranties and Tax Deed: mostly in liquidator/receiver sales (must be thorough DD) • Start-up Insurance: cover warranties a Founder may be required to give to an investor (e. g. VC) – more expensive • Enhancements: US clients pushing European insurers for terms/enhancements available in US (e. g. indemnity basis for recovery) • Premiums falling: - More competition, more entrants - 0. 5% to 1. 7% of Insurance Limit Dublin London New York Francisco San Franscisco

For further information and advice, please contact one of our team: 13 Irish Private M&A Study 2019