What is a "rep & warranty deal"? Forum

[Anonymous User]

Is that basically just a deal where the central issues are tied to what's being negotiated in the rep & warranty section?

[LittleRedCorvette]

Is that basically just a deal where the central issues are tied to what's being negotiated in the rep & warranty section?

Without any other context or information, I would assume that it refers to a deal where representation and warranty insurance is being purchased.

[CanadianWolf]

Are you in M&A ?

[Anonymous User]

Is that basically just a deal where the central issues are tied to what's being negotiated in the rep & warranty section?

Without any other context or information, I would assume that it refers to a deal where representation and warranty insurance is being purchased.

agreed

[Yardbird]

It def means a RWI deal, meaning typically no survival or reps beyond closing date, no indemnities other than specified indemnities (usually specific tax or environmental or litigation matters), more wholesome reps generally, and some added language about the policy (who bears the cost, who bears the retention, timing of binding policy if not bound at signing).

[Anonymous User]

I agree with the other posters. A "rep and warranty deal" is most likely referring to a M&A transaction where the seller will not indemnify the buyer for breaches of the rep and warranties that the seller makes in the purchase agreement. Instead, the buyer will purchase rep and warranty insurance ("RWI") where if the seller breaches the rep and warranties under the purchase agreement, then the buyer's recourse is to contact its rep and warranty insurance provider and file a claim.

[woopig2017]

All of the above is generally correct, although the ability of the buyer to seek recourse from the seller (outside of the claim that they can make against their rep and warranty insurance policy) varies from deal to deal. In larger deals, generally the buyer will have very little ability (if any at all) to seek any recourse from the seller. In smaller deals (or deals where the seller has less negotiating power), the buyer may be able to seek recourse from the seller for breaches of certain "fundamental" reps and/or for fraud.

[soft blue]

Not an M&A lawyer, so just asking out of curiosity: how does this make any sense at all? Like, why does the RWI underwriter think they know the seller better than the seller itself? Seems like a pretty obvious adverse selection problem. In theory, I get the appeal to both sides - seller gets finality; buyer gets a deeper-pocketed counterparty that has some franchise interest in paying out valid claims. I just don't get how the insurer fits into this model unless they're charging obscene premiums and/or have pretty piddly coverage limits.

[Anonymous User]

Not an M&A lawyer, so just asking out of curiosity: how does this make any sense at all? Like, why does the RWI underwriter think they know the seller better than the seller itself? Seems like a pretty obvious adverse selection problem. In theory, I get the appeal to both sides - seller gets finality; buyer gets a deeper-pocketed counterparty that has some franchise interest in paying out valid claims. I just don't get how the insurer fits into this model unless they're charging obscene premiums and/or have pretty piddly coverage limits.

The insurers / underwriters do a fair bit of diligence upfront (arguably more than a sophisticated buyer in many cases) and exclude a number of known risks upfront. E.g., there are higher premiums for cyber risk, many policies don’t cover employee misclassification, etc. The product is also priced in a way that covers risk of claims / payouts (which are not all that common in the area, still). Of course, it’ll take just a couple of huge payouts for premiums to go up. Some buyers may decide it’s still worth the price.

[Anonymous User]

Not an M&A lawyer, so just asking out of curiosity: how does this make any sense at all? Like, why does the RWI underwriter think they know the seller better than the seller itself? Seems like a pretty obvious adverse selection problem. In theory, I get the appeal to both sides - seller gets finality; buyer gets a deeper-pocketed counterparty that has some franchise interest in paying out valid claims. I just don't get how the insurer fits into this model unless they're charging obscene premiums and/or have pretty piddly coverage limits.

The insurers / underwriters do a fair bit of diligence upfront (arguably more than a sophisticated buyer in many cases) and exclude a number of known risks upfront. E.g., there are higher premiums for cyber risk, many policies don’t cover employee misclassification, etc. The product is also priced in a way that covers risk of claims / payouts (which are not all that common in the area, still). Of course, it’ll take just a couple of huge payouts for premiums to go up. Some buyers may decide it’s still worth the price.

pretty much this, RWI gets access to all of the buy side diligence and imposes fairly non-negotiable exclusions / deemed disclosures on obvious sources of liability. I assume the premia adequately reflects the risk

[Anonymous User]

Not an M&A lawyer, so just asking out of curiosity: how does this make any sense at all? Like, why does the RWI underwriter think they know the seller better than the seller itself? Seems like a pretty obvious adverse selection problem. In theory, I get the appeal to both sides - seller gets finality; buyer gets a deeper-pocketed counterparty that has some franchise interest in paying out valid claims. I just don't get how the insurer fits into this model unless they're charging obscene premiums and/or have pretty piddly coverage limits.

The insurers / underwriters do a fair bit of diligence upfront (arguably more than a sophisticated buyer in many cases) and exclude a number of known risks upfront. E.g., there are higher premiums for cyber risk, many policies don’t cover employee misclassification, etc. The product is also priced in a way that covers risk of claims / payouts (which are not all that common in the area, still). Of course, it’ll take just a couple of huge payouts for premiums to go up. Some buyers may decide it’s still worth the price.

pretty much this, RWI gets access to all of the buy side diligence and imposes fairly non-negotiable exclusions / deemed disclosures on obvious sources of liability. I assume the premia adequately reflects the risk

There's also a growing trend toward split retention RWI policy products requiring the buyer to bear the first 0.5-2% of losses themselves (in a manner that resembles a customary R&W indemnity escrow) before accessing the RWI policy. This incentivizes the buyer to perform full due diligence and negotiate arms-length / fulsome R&Ws and police the disclosure schedules appropriately.