Insurance that takes risk out of reps and warranties gains favour in weak economy

Wherever there’s risk, there’s usually someone prepared to insure it for the right price.

Early this past year, we introduced you to definitely a novel product appearing in M&A circles called “representation and warranty insurance” or RWI. Lawyers the product is starting to become a typical feature of non-public deals, specially those where a private equity fund is the purchaser.

Bryan Haynes, a lawyer in the Calgary office of Bennett Jones LLP who specializes in private and cross-border transactions, says 2015 was a “banner year” for that use of RWI.

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“Three years ago, people didn’t understand what it had been and they checked out it with a little little bit of suspicion and caution. But I think there’s an over-all acceptance now,” Haynes says. “There’s been a brief history now of policies being underwritten, of claims being made, and claims being paid. With this, there’s an over-all comfort level.”

RWI kicks in if your seller is asked to refund a few of the purchase price due to a post-closing event that arguably runs contrary to the representations and warranties which were made throughout the deal talks.

It’s possible to negotiate an offer in which the seller would directly indemnify a purchaser if necessary. But this can be a hot topic in M&A negotiations. RWI was invented two decades ago to bridge indemnity valuation gaps that would otherwise sink deals.  

Kurt Sarno, co-head of the private equity finance group at Blake, Cassels & Graydon LLP, says the weakening economy will likely broaden the cavern between vendors and buyers in negotiating such indemnification agreements. Which makes RWI even more relevant today, he states.

“It can get deals across the finish line where, in times such as this, the seller wouldn’t wish to go ahead and take risks that a buyer wants it to carry in respect of indemnification obligations.”

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In this day and age, it’s hard to conceive of any company either using or condoning using slavery and child labour. The problem persists, a minimum of on the global basis. Based on the International Labour Organization, almost 21 million men, ladies and children work in some form of modern slavery.

Opposing this appears like a motherhood issue, but there’s a hard legal edge for this. Businesses who turn a blind eye to the issue run the risk of having slave labour pop up in their supply chains. 

The Canadian Bar Association meets in Ottawa this weekend to consider several policy proposals. One matter around the agenda is really a package of “model business principles” a business could adopt to make sure it avoids using forced labour, trafficked labour or illegal or harmful child labour in either its own operations or its supply chain.

Putting together the model code wasn’t as simple as you might think. For instance, with a complete ban on child labour overlooks that there are many situations by which children might operate in a household owned business, such as a farm, convenience store or restaurant.

Stephen Pike, a Toronto-based partner with Gowling Lafleur Henderson LLP,  approached a wing of the CBA that is representative of in-house and company lawyers, the Canadian Corporate Counsel Association, with the idea of putting the guideline together. The Canadian model business principles are based on guidelines from the Un and resemble principles recently adopted by the American Bar Association.

The proposed Canadian principles would be voluntary, and they’re designed so that companies can adopt them to suit their businesses. “They’re more of a recommendation than a prescription,” Pike says.

It’s worth noting that some jurisdictions have legislated strict roles. California, for example, requires larges businesses operating there to disclose their efforts to eradicate human trafficking and slavery using their supply chains. The U.K. will mandate the publication of the annual statement on slavery and human trafficking, starting with corporate years that end after March 31 of this year.

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Save the date: We can now tell you the 2016 Canadian General Counsel Awards gala will require place June 1 at the Fairmont Royal York in Toronto.

Nominations for the 12th annual CGCAs could be submitted via email (nominations@cgca.ca) until March 24. The honours, founded through the National Post and ZSA Legal Recruitment, would be the only national awards designed exclusively to acknowledge excellence in Canada’s in-house counsel community.

The award website (cgca.ca) has a sample nomination form plus more information around the eight award categories. Dan Malamet of ZSA (dmalamet@zsa.ca) can also respond to questions.

dhasselback@nationalpost.com
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