In an article published online by the Nashville Business Journal, Bass, Berry & Sims attorney Kris Kemp provided insight on the most significant trend affecting mergers and acquisitions: representations and warranties insurance (RWI). RWI is being used to fund indemnification obligations that were historically only funded by the seller. Valuation multiples are at an all-time high, rendering favorable legal terms for sellers like lower escrows and indemnification limitations. "This pro-seller environment is forcing buyers to look to alternative funding sources in the event that otherwise indemnifiable losses arise after a transaction is completed," explained Kris.
Private equity transactions have played a role in the rise of RWI, as transferring risk to the insurance carrier avoids post-closing conflicts as the company is operated. Private equity funds that sell their portfolio also benefit because RWI enables the funds to distribute sales proceeds to investors quickly because that money is not tied up in escrow.
RWI is also having a significant impact on the healthcare market. "Insurance carriers have now created underwriting teams exclusively focused on health care transactions, permitting them to offer health care coverage riders at reasonable premiums," noted Kris.
If pursuing a claim against an insurance carrier is no more difficult than an indemnification claim against a seller, then M&A players should expect to see RWI used, or at least brought up, in the majority of M&A transactions.
The full article, "New M&A Trend: More Reps and Warranties Insurance," was published online by the Nashville Business Journal on January 26, 2018, and is available online.