M & A Representations and Warranties Insurance

M & A Representations and Warranties Insurance

There is a significant emerging trend in the use of M&A representations and warranties insurance in mergers and acquisitions of privately held companies. Both strategic acquirers and private equity buyers have gotten increasingly comfortable in using such insurance for their acquisitions, providing meaningful benefits to both the buyer and seller in an acquisition.

As a prelude, representations and warranties by a seller are key components of an acquisition agreement and are often heavily negotiated by the parties. In a traditional M&A transaction, the seller (or its shareholders) agree to indemnify the buyer (subject to caps, exclusions, and time limits) for breaches of the seller’s representations and warranties. Often, the indemnity has been backed by an escrow of a portion of the proceeds otherwise payable at the closing (typically 10% to 15% for one to two years). The emerging use of representations and warranties insurance is modifying or eliminating this traditional structure.

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