2014 Marsh USA Inc. ABA Private Equity M&A Sub-Committee January 30-31, 2015
Agenda M&A Transactional Insurance Overview Representations & Warranties Insurance Tax Indemnity Insurance Other Contingent Liabilities / Due Diligence Issues Appendix Contact Information and Biographies 2014 Marsh USA Inc. 1
Liabilities Inherent to the Transaction Representations & Warranties Tax Indemnities Other Contingent Liabilities / Diligence Issues Directors and Officer Liability Product Liability Surety / Replacement Letters of Credit Environmental / Pollution, Remediation Successor Liability Cyber / Network Security 2014 Marsh USA Inc. 2
Transactional Risk Insurance Overview Created to facilitate M&A transactions by addressing indemnification issues that arise during the negotiation of the transaction or during due diligence that may prevent the deal from closing: Representations & Warranties Insurance Tax Indemnity Insurance Contingent Liability Insurance Traditional Solutions/Resolutions: Renegotiation of Deal Terms Purchase Price Reduction/Earnout/Holdback, etc. Escrow/Indemnity Buyer or Seller Forced to Take Unwanted Risk Walk Away from Deal Alternative Solution: Transactional Risk Insurance 2014 Marsh USA Inc. 3
REPS & WARRANTIES INSURANCE 2014 Marsh USA Inc.
Reps & Warranties Insurance: State of the Market Increased popularity Over 1000 deals done in 2014 (split between corporate and PE buyers) Insurance market well-developed Insurers / brokers staffed by former attorneys work on deal timeframes Policies are customized Underwriting process is streamlined Individual claims paid range from $500k to over $100mm Target transactions Transactions between $50M - $2B+ Limits available up to $350M+ per deal Generally, no restrictions on industry sector (except healthcare) Insurer commitment Ace, AIG, Allied World, Ambridge, Beazley, Concord and Hartford International capabilities 2014 Marsh USA Inc. 5
Reps & Warranties Insurance Overview (Cont d) Examples of transactions where R&W insurance may be particularly useful: The target business is a public company The target company is a private company but the sellers are several and diverse The contractual indemnification is limited to insufficiently sized escrows The target business is owned by financial sponsors whose fund lives may be near expiration The seller is not credit worthy The target business is being sold by a distressed company The target business is being acquired in a competitive process The target s management make up a large part of the selling group 2014 Marsh USA Inc. 6
Reps & Warranties Insurance: Typical Uses Buyers Risk Management Uses Increase maximum indemnity / extend survival period for breaches of reps & warranties Elimination of seller post-closing credit risk Provide recourse when no seller indemnity possible (public company sales, bankruptcy) Sellers Risk Management Uses Reduce contingent liabilities Distribute sale proceeds Protect passive sellers Strategic Uses Distinguish bid in auction Protect key relationships Strategic Uses Attract best offers by maximizing indemnification Include R&W Insurance as the sole remedy in draft agreements in auctions 2014 Marsh USA Inc. 7
Reps & Warranties Insurance: Key Considerations Policies are fully manuscripted Limited policy exclusions Actual knowledge exclusion Certain expanded coverage may require some additional premium Premiums 2.5% to 4% of the policy limit (one-time payment) Rates typically lower outside of U.S. Deductibles Buyer-insured policies often use the escrow as the deductible Seller-insured policies use a negotiated limit typically no less than 1% - 2% of the Purchase Price Step-downs after the passage of time Engage broker early in process 2014 Marsh USA Inc. 8
Reps & Warranties Insurance: Key Considerations (Cont d) Definition of Recoverable Damages Damages based on multiples Consequential and similar damages Tort-based damages Interplay between Insurance Policy and M&A Contract Control of defense Settlements of claims 2014 Marsh USA Inc. 9
TAX INDEMNITY INSURANCE 2014 Marsh USA Inc.
Tax Indemnity Insurance Overview Coverage Insures against the financial consequences of an intended tax treatment being disallowed by relevant tax authority in situations where: There is no clear precedence or guidance Tax authority approval (e.g., PLR) is not available or cannot be received in required time frame Potential downside is significant relative to transaction size / financial model does not allow for margin for error Tax indemnity insurance most commonly used to: Insure the conclusion of a tax opinion or backstop / replace the subject matter of a tax indemnity Typical Uses 355 Spin-offs 338(h)(10) elections/s-corp Issues Cancellation of Indebtedness Net Operating Loss Protection Successor liability Tax-free reorganizations Liquidating Trust status Capital Gain v. Ordinary Income Treatment 2014 Marsh USA Inc. 11
Tax Indemnity Insurance Overview Covered Items Additional Tax Liability Fines & Penalties Interest Legal Cost Tax Gross Up Key Coverage Issues Cost: Generally 4% - 8% of policy limit but varies depending on facts and circumstances Deductible: Varies by deal (often no deductible required) Underwriting: Varies by insurer (similar to R&W underwriting process) tax opinion is not required 2014 Marsh USA Inc. 12
OTHER CONTINGENT LIABILITIES / DUE DILIGENCE ISSUES 2014 Marsh USA Inc.
Other Contingent Liabilities D&O Insurance / Executive & Management Liability: Executive & Management Liability Protection Addressing Runoff / Tail of Past Liability at Change of Control Addressing Appropriate Go-Forward Coverage Who Typically Pays for Runoff / Tail Impacts To Protection Provisions Of the Policy Pending Litigation Employment Related Claims / Wage & Hour Regulatory Investigations / Pre-Claim Defense 2014 Marsh USA Inc. 14
Other Contingent Liabilities (Cont d) Products Liability: Assumption or Transfer of Liabilities Arising From Company Products (whether manufactured, sold or distributed) Insurability of Such Products Run-off of Past Liabilities (when to purchase a Tail Coverage) Claims made vs. Occurrence Policies Surety & Collateral Issues / Replacement Letters of Credit: Existing Seller Indemnification (Release of Current Surety Bonds, Issuance of New Bonds, Assumption of Line Collateralized, Surety Carrier Appetites) Availability of Revolver, Review of Balance Sheet Accruals 2014 Marsh USA Inc. 15
Other Contingent Liabilities (Cont d) Environmental, Pollution, Remediation Insurance: Pollution Legal Liability Insurance, Cost-Cap / Remediation Protection Coverage for clean up costs, bodily injury, property damage exposures resulting from pollution conditions under or migrating from owned/operated insured property(ies); Pre-existing and new conditions coverage available Successor Liability: Access to Historical Company Policies to cover pre-acquisition product-line or environmental or other general liabilities Loss Sensitive/Large Deductible Insurance Programs (GL, Auto, WC) 2014 Marsh USA Inc. 16
Other Contingent Liabilities (Cont d) Cyber Liability & Security/Privacy Protection: Trends in the Cyber Liability Marketplace Data breaches are increasing in all industry sectors Trends relative to Cyber Reps & Impact to Insurance Types of companies that are purchasing cyber insurance Typical coverage grants on cyber liability insurance Cost / limit of liability expectations Leading cyber liability carriers (AIG, ACE, Axis, Lloyds) 2014 Marsh USA Inc. 17
APPENDIX CONTACT INFORMATION AND BIOGRAPHIES 2014 Marsh USA Inc. 18
CONTACT INFORMATION: Kimberly Patlis Walsh President & Managing Director Corporate Risk Solutions, LLC Tel: 212.686.7727 patlis@crslimited.com Craig A. Schioppo Transactional Risk Practice Leader, Managing Director Marsh USA Inc. Tel: 212.345.6492 craig.schioppo@marsh.com 2014 Marsh USA Inc. 19
Craig A. Schioppo, Marsh Inc. Managing Director, FINPRO Current Responsibilities As leader of Marsh s Transactional Risk Group, Craig is known as an expert in the insurance of financial and transaction risk, regulatory, environmental and litigation risks. Craig is constantly involved in the development of dedicated insurance products that facilitate mergers, acquisitions and other corporate transactions. He is also involved in negotiating the terms and conditions of all of the Transactional Risk Solutions. Experience Craig began his career as a Staff Accountant at Anchin Block & Anchin LLP in 1993. After spending two years as an auditor, Craig spent the next five years as a Supervisor in the Tax Department where he was intimately involved in both corporate and individual tax planning and compliance. During his last four years as an accountant, Craig attended New York Law School as an evening student and was a Notes and Comments Editor of the law review. Upon graduating law school, Craig spent the next four years practicing corporate and securities law at Kramer Levin Naftalis & Frankel LLP. As a corporate attorney, Craig had a diverse transactional-based practice with significant experience in domestic and cross-border mergers and acquisitions, joint ventures, securities and general corporate matters. Education BS, Accounting, State University of New York at Albany JD, magna cum laude, New York Law School 2014 Marsh USA Inc. 20
Kimberly Patlis Walsh, Corporate Risk Solutions, LLC President & Managing Director Current Responsibilities Kimberly runs CRS private equity and alternative investment practice and manages CRS business operations. She brings over 20 years of insurance underwriting, business & risk management subject matter expertise and multinational client advisory work to her current role. Experience Prior to joining CRS in September 2003, Kimberly held various positions at AIG in NY and Los Angeles, and prior to her departure was Senior Vice President of AIG's Mergers & Acquisitions Division, structuring insurance and financial solutions for companies to address liabilities within mergers, acquisitions, divestitures and corporate transactions. During her 11 year tenure at AIG, she was primarily focused on underwriting risks within both the private equity space, as well as corporate transactions. Kimberly was also a part of its strategic relationship team responsible for identifying crossopportunities between AIG s investment and insurance clients. Kimberly began her career as a paralegal at Fried, Frank, Harris, Shriver & Jacobson, LLP. Education BA, History & English, State University of New York at Albany She is active in the private equity, hedge fund and venture capital community, and is a member of the Association of Capital Growth (ACG). She is also involved with the Risk & Insurance Management Society (RIMS) and the Professional Liability Underwriting Society (PLUS). 2014 Marsh USA Inc. 21