Private Equity M&A Subcommittee
Representation and Warranty Insurance:
Where Did That Come From and
How Does It Effect Our Practice
Moderator:David I. Albin
Finn Dixon & Herling
Stamford, Connecticut
Panelists:Nathaniel L. Doliner
Carlton Fields, P.A.
Tampa. Florida
Linda Maxwell
Houlihan Lokey
Los Angeles, California
William Monat
Willis Towers Watson
Chicago, Illinois
SLIDES
Laguna Beach, California
January 27, 2017
{02415504; 2; 9000-14 }1
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3.7Absence of Undisclosed Liabilities
Except as set forth in Section 3.7(b) of the Company Disclosure Letter, no Seller Company has any liability or obligation (absolute, accrued, contingent, or otherwise), except such liabilities or obligations (i) set forth or described on any other section of the Company Disclosure Letter, (ii) as are reserved against or reflected in the Most Recent Company Balance Sheet or of a nature not otherwise required pursuant to GAAP to be reserved against or reflected therein, and/or (iii) as have been incurred in the Ordinary Course of Business since the date of such balance sheet.
3.6Intellectual Property
(c)Except as set forth on Section 3.6(c) of the Company Disclosure Letter:
(i)no Seller Company has received written notice of any infringement or other violation of its right in any of the Company Intellectual Property and, to the Company’s Knowledge, no claim against a third party with respect to the alleged infringement or misappropriation of the Company Intellectual Property is currently pending or threatened,
(ii)there is no claim pending or, to the Company’s Knowledge, threatened, against any Seller Company with respect to the alleged infringement, misappropriation, or violation by any Seller Company or any Company Intellectual Property of any Intellectual Property rights of any third party,
(iii)no litigation is pending wherein any Seller Company or any Company Intellectual Property is alleged to infringe, misappropriate, or violate any Intellectual Property right of any third party, and
(iv)to the Company’s Knowledge, the conduct of the business of the Company by the Seller Companies does not violate, interfere with, infringe upon or misappropriate any Intellectual Property rights of any third Person.
3.20No Other Representations or Warranties; Disclosure.
(a)Except for the representations and warranties of the Company expressly set forth in this Agreement, and in furtherance of the provisions of Section 12.13 and not in limitation thereof, neither the Company nor any other Person makes any other express or implied representation or warranty on behalf of any of the Seller Companies or otherwise, in each case in respect of the Seller Companies, the Business of the Seller Companies, their respective assets and liabilities or otherwise.
(b) EXCEPT AS SET FORTH IN THIS ARTICLE 3, THE COMPANY MAKES NO REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED (INCLUDING THOSE REFERRED TO IN THE UNIFORM COMMERCIAL CODE OR IN ANY STATUTE OR RULE OF LAW THAT CAN BE LIMITED OR WAIVED AND WOULD OTHERWISE BE APPLICABLE TO REAL PROPERTY), AND THE ASSETS AND BUSINESS OF THE SELLER COMPANIES SHALL BE DEEMED TO BE “AS IS, WHERE IS” ON THE CLOSING DATE, AND IN THEIR THEN PRESENT CONDITION, AND PURCHASER SHALL RELY UPON ITS OWN EXAMINATION THEREOF. IN ANY EVENT, THE COMPANY MAKES NO WARRANTY OF MERCHANTABILITY, SUITABILITY, FITNESS FOR A PARTICULAR PURPOSE, OR QUALITY, WITH RESPECT TO ANY OF THE TANGIBLE ASSETS OF THE SELLER COMPANIES, OR AS TO THE CONDITION OR WORKMANSHIP THEREOF OR THE ABSENCE OF ANY DEFECTS THEREIN, WHETHER LATENT OR PATENT.
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5.7Independent Investigation. In making the decision to enter into this Agreement and to consummate the transactions contemplated hereby, other than reliance on the representations, warranties, covenants and obligations of the Company and the Seller set forth in this Agreement, Purchaser has relied solely on its own independent investigation, analysis and evaluation of the Company Units (including Purchaser’s own estimate and appraisal of the value of the Business, financial condition, assets, operations and prospects of the Seller Companies). Purchaser confirms to the Seller that Purchaser is sophisticated and knowledgeable in both the industry and the Business of the Seller Companies and is capable of evaluating the matters set forth above. For the avoidance of doubt, Purchaser acknowledges and agrees that the Seller shall have no liability under this Agreement with respect to any information concerning the Seller Companies not expressly represented and warranted to in this Agreement, including, but only to the extent not also expressly represented and warranted to in this Agreement (including the Company Disclosure Letter), (a) any information set forth in any Confidential Information Memorandum distributed by [IB] with respect to the Seller Companies, (b) any information regarding the Seller Companies provided at any management presentation related to the transactions contemplated by this Agreement, (c) any information communicated by or made available through the data room process, or (d) any financial projection or forecast relating to any of the Seller Companies; provided, that the foregoing acknowledgment and agreement shall not limit, in any way, the representations or warranties made by the Company hereunder or the rights of the Purchaser Indemnified Parties with respect to breaches thereof or inaccuracies therein.
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ARTICLE 10
SURVIVAL AND INDEMNIFICATION[1]
10.1Survival. The representations and warranties, and covenants or obligations, contained in this Agreement shall survive the Closing as follows:
(a)Representations and Warranties. The representations and warranties of the parties contained in this Agreement shall survive the Closing for the Escrow Period, and shall terminate and be of no further force or effect upon the expiration of the Escrow Period.
(b)Claims Cut-Off Date. No claim for indemnification may be made, and no Indemnifying Person shall have any liability with respect to, any claim for indemnification first asserted or delivered after the earlier of (i) the expiration of the applicable survival period and (ii) termination of the representations and warranties or covenants or obligations (in each case, as set forth in subsections (a) and (b), above) on the breach or failure of which such claim is based (the “Claims Cut-Off Date”); provided that if an Indemnified Person delivers written notice to an Indemnifying Person of an indemnification claim (stating in reasonable detail the nature of, and factual and legal basis for, any such claim for indemnification) on or before the close of business on the Claims Cut-Off Date, any such claim, and the representations and warranties, or covenants or obligations, as applicable, on which such claim is based, shall survive (solely for purposes of such claim) until such claim is resolved or judicially determined.
10.2 Indemnification by Seller.
(a)Subject to Section 10.4, from and after the Closing, the Seller agrees to indemnify Purchaser, its Affiliates, their successors and assigns, and any of their respective agents, employees, representatives, officers and directors (the “Purchaser Indemnified Parties”), against, and hold Purchaser Indemnified Parties harmless from, any and all Losses suffered by any Purchaser Indemnified Party to the extent arising out of any breach of or any inaccuracy in any representation or warranty made by the Company in Article 3 of this Agreement. The Purchaser’s recovery under this Section10.2(a) shall be limited to the Escrow Account, as set forth in Section 10.4(b).
10.3 Limitations on Liability of Seller. Notwithstanding any other provision of this Agreement:
(b)De Minimis Threshold. The Seller shall not have any liability for any Loss or Losses in connection with any given claim (or one or more substantially related claims) for indemnification hereunder unless and until the aggregate amount of Losses incurred with respect to such claim (or one or more substantially related claims) is equal to or greater than $50,000 (the “De Minimis Threshold”).
(c)Indemnifiable Losses Basket. The Purchaser Indemnified Parties shall have the right to payment by the Seller under Section 10.2 only if, and only to the extent that, Purchaser Indemnified Parties shall have incurred or suffered, as to all matters giving rise to indemnification under Section 10.2, aggregate indemnifiable Losses in excess of a deductible amount equal to $[●][2] (the “Indemnifiable Losses Basket”) at which time the Purchaser Indemnified Parties shall be entitled to indemnification with respect to all such Losses in excess of the amount of the Indemnifiable Losses Basket, which shall be a deductible.
(d)General Cap; Escrow Sole Source of Recovery. (i) The aggregate liability of the Seller for indemnifiable Losses under Sections 10.2(a) and 10.2(b)(i)[NTD – sections for indemnification for representations]shall not exceed the Escrow Amount, (ii) the Seller shall not have any liability for indemnifiable Losses under Sections 10.2(a) and 10.2(b)(i) in excess of the Escrow Amount, and (iii) the monies paid into the Escrow Account at the Closing as the Escrow Amount shall be the Purchaser Indemnified Parties’ sole and exclusive source of recovery with respect to any amounts required to be paid by the Seller under Sections 10.2(a) and 10.2(b)(i).
(e)Exclusive Remedy. The sole and exclusive liability and responsibility of the Seller to Purchaser Indemnified Parties under or in connection with this Agreement, the Transaction Documents delivered by Seller at Closing or the transactions contemplated hereby or thereby (including for any breach of or inaccuracy in any representation or warranty or for any breach of any covenant or obligation or for any other reason), and the sole and exclusive remedy of Purchaser Indemnified Parties with respect to any of the foregoing, shall be as set forth in this Article 10, except in the case of Seller’s liability for actual fraud by the Seller with the intent to deceive. Notwithstanding the foregoing, nothing in this Article 10 shall prevent or restrict the right of any party to obtain injunctive relief or specific performance from a court of competent jurisdiction. To the extent that Purchaser Indemnified Parties or any Seller Company have any Losses for which they may assert any other right to indemnification, contribution or recovery from the Seller (whether under this Agreement, any of the Transaction Documents delivered by the Seller at Closing or under any common law or any statute, including any Environmental Law, or otherwise), Purchaser hereby (i) waives, releases and agrees not to assert such right, and (ii) agrees to cause each of the Purchaser Indemnified Parties and the Seller Companies to waive, release and agree not to assert such right.
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Section 7.2Right of Parent and Surviving Corporation to be Indemnified out of Retained Merger Consideration. The Parent, the Surviving Corporation and their respective assigns are entitled to be indemnified, defended and held harmless, out of the Escrow Fund at any time, from and against any Adverse Consequences suffered, sustained, incurred or required to be paid by the Parent, the Surviving Corporation or their respective assigns, as the case may be, based upon, arising out of or otherwise with respect to a breach or inaccuracy of any representation or warranty of the Company (or any occurrence or event which would have caused such a breach or inaccuracy but for the inclusion of any language qualifying such representation or warranty by references to materiality and knowledge) for which a claim was asserted prior to the expiration of the applicable survival period, and/or....
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10.5Net Losses; Subrogation; Mitigation.
(a)Notwithstanding anything contained herein to the contrary, the amount of any Losses incurred or suffered by an Indemnified Person shall be calculated after giving effect to (i) any insurance proceeds received by the Indemnified Person (or any of its Affiliates) with respect to such Losses, (ii) any Tax Advantage realizable by the Indemnified Person (or any of its Affiliates) arising from the facts or circumstances giving rise to such Losses, and (iii) any recoveries obtained by the Indemnified Person (or any of its Affiliates) from any other third party. Each Indemnified Person shall exercise commercially reasonable best efforts to obtain such proceeds, benefits and recoveries. If any such proceeds, benefits or recoveries net of any expenses incurred by such Indemnified Person in collecting such amount are received by an Indemnified Person (or any of its Affiliates), with respect to any Losses after an Indemnifying Person has made a payment to the Indemnified Person with respect thereto, the Indemnified Person (or such Affiliate) shall pay to the Indemnifying Person the amount of such proceeds, benefits or recoveries net of any expenses incurred by such Indemnified Person in collecting such amount (up to the amount of the Indemnifying Person’s payment). With respect to any Losses incurred or suffered by an Indemnified Person, no liability shall attach to the Indemnifying Person in respect of any Losses to the extent that the same Losses have been recovered by the Indemnified Person from the Indemnifying Person, accordingly, the Indemnified Person may only recover once in respect of the same Loss.
(b)Upon making any payment to an Indemnified Person in respect of any Losses, the Indemnifying Person shall, to the extent that such payment represents payment in full of such Losses, be subrogated to all rights of the Indemnified Person (and its Affiliates) against any third party in respect of the Losses to which such payment relates. Such Indemnified Person (and its Affiliates) and Indemnifying Person shall execute upon request all instruments reasonably necessary to evidence or further perfect such subrogation rights.
(c)Nothing in this Agreement in any way restricts or limits the general obligation at Law of an Indemnified Person to mitigate any loss which it may suffer or incur by reason of the breach by an Indemnifying Person of any representation, warranty, covenant or obligation of the Indemnifying Person under this Agreement, including by asserting claims against a third party or by otherwise qualifying for a benefit that would reduce or eliminate an indemnified matter.
(d)To the extent that any breach of any representation or warranty contained in this Agreement or any other provision of this Agreement is capable of remedy, the Indemnified Person shall afford the Indemnifying Person a reasonable opportunity to remedy the matter complained of.
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10.7Notice of Third Party Claims; Assumption of Defense. The Indemnified Person shall give notice as promptly as is reasonably practicable, but in any event no later than fifteen (15) Business Days after receiving notice thereof, to the Indemnifying Person of the assertion of any claim, or the commencement of any suit, action or proceeding, by any Person not a party hereto in respect of which indemnity may be sought under this Agreement (which notice shall, to the extent such information is reasonably available, specify in reasonable detail the nature and amount of such claim together with such information as may be necessary for the Indemnifying Person to determine that the limitations in Section10.4 have been satisfied or do not apply); provided, however, that the failure to so give such notice shall prevent an Indemnified Person from claiming indemnification with respect to such claim only if, and only to the extent that, such failure results in the forfeiture of rights and defenses otherwise available with respect to such claim or otherwise results in actual prejudice to the Indemnifying Person. The Indemnifying Person may, at its own expense, (a) participate in the defense of any such claim, suit, action or proceeding, and (b) so long as the claim involves only money damages and does not seek an injunction or other equitable relief against the Indemnified Person, upon notice to the Indemnified Person given within fifteen (15) days of the Indemnifying Person’s receipt of the notice of commencement thereof, assume the defense thereof with counsel of its own choice for so long as the Indemnifying Person conducts the defense of such claim actively, diligently and in good faith. In the event of such assumption, the Indemnifying Party shall have the exclusive right to settle or compromise any such claim, suit, action or proceeding which (A) provides for the payment out of the Escrow Account and/or by the Indemnifying Person of money as the sole relief, (B) results in the full and general release of the Indemnified Person from all liabilities arising or related to or in connection with the claim and (C) involves no finding or admission of any violation of Law or the rights of any Person and has no effect on any other claims that may be made against the Indemnified Person at any time during the course of any such claim, suit action or proceeding. If the Indemnifying Person assumes such defense, the Indemnified Person shall have the right (but not the duty) to participate in the defense thereof and to employ counsel, at its own expense, separate from the counsel employed by the Indemnifying Person. Whether or not the Indemnifying Person chooses to defend or prosecute any such claim, suit, action or proceeding, all of the parties hereto shall cooperate in the defense or prosecution thereof.
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Item 3 / Policy Period / Effective Date: May [], 2015Expiration Date: May [], 2018 for all Representations and Warranties other than the Fundamental Representations
May [], 2021 for the Fundamental Representations
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Item 7 / Premium / US$276,000Slide 9
Item 6 / Retention / US$1,350,000 in the aggregate until the Retention Dropdown Date.Thereafter, the Retention shall be reduced to the lesser of: (i) US$500,000; or (ii) US$1,350,000 less the total amount of Loss then incurred or reasonably expected to be incurred resulting from claims incurred or made on or before the Retention Dropdown date.
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Actual Knowledge / means actual personal knowledge and for the avoidance of doubt does not include constructive or imputed knowledge nor does it include any actual, constructive or imputed knowledge of any advisor or agent of the Insured.Slide 11
Actual Knowledge / means actual personal knowledge and for the avoidance of doubt does not include constructive or imputed knowledge nor does it include any actual, constructive or imputed knowledge of any advisor or agent of the Insured. The Insurer shall bear the burden of proving that any of the Transaction Team Members had actual personal knowledge.Slide 12
Breach / means any breach of the Representations and Warranties.For purposes of determining whether a breach has occurred, any qualifications as to materiality, “Material Adverse Effect” or similar qualifications set forth in the Representations and Warranties contained in the Acquisition Agreement shall be disregarded.
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Breach / means any breach of the Representations and Warranties.For purposes of determining whether a breachBreachhas occurred as well as the amount of the Loss resulting from any Breach, any qualifications as toor exceptions in any Representations and Warranties contained in the Acquisition Agreement relating to or referring to the terms “material”,“materiality”, “in all material respects”, “Material Adverse Effect” or similar qualificationsterm or phrase set forth in the Representations and Warranties contained in the Acquisition Agreement, as well as all qualifications therein based on the knowledge of the Sellers and/or the Target, shall be disregarded.
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