REPRESENTATIONS & WARRANTIES INSURANCE

William B. Rowland

+1.404.581.8961

wbrowland@jonesday.com

IMPROVING DEAL OUTCOMESTHROUGH STRATEGIC RISK MANAGEMENT

Escrow /

Indemnity Cap Premium

Escrow

R&W Policy

R&W: TWO-STEP PROCESS MAY TAKE 2-3 WEEKS, DEPENDING

Step 1

• Engage Broker

• Negotiate NDAs, Confidentiality

Agreements

• Provide Transaction Document,

Audited Financials, CIM

• Negotiate Non-Binding

Indication Letters (“NBILs” or

Quotes)

Step 2

• Choose Insurers

(primary and excess, if necessary)

• Provide Access to Data Room,

Diligence Materials

• Hold an Underwriting Call

(Insurers, Buyer, Buyer’s Advisors)

• Negotiate R&W Policy

• Bind at Signing or Closing

THE BASICS OF BUY-SIDE R&W INSURANCE

• Coverage: Losses resulting from Breaches of Seller’s Representations,

Pre-closing Taxes, Third Party Claims (defense costs / damages)

• Policy Limits (Cap): 10% to 15% Enterprise Value (mirrors typical escrow

holdback)

• Retention (Deductible): 1% Enterprise Value (below 1% “fairly routinely”)

• Policy Period (Survival): 3 Years for General Reps; 6 Years

Fundamentals and Tax (including Pre-Closing Tax Indemnity)

• Costs: Premium, Underwriting Fee, Broker Commission, Taxes/Fees

Generally 3% to 4% but can be lower (2% to 3% for $50M+ limits) or

higher (6% or more for $5M or lower limits)

R&W: ADVANTAGES FOR BUYERS

• Broader coverage for reps than available in negotiation

(e.g., extended survival periods, broader definition of damages)

• Make bid more attractive, contract easier to negotiate with sellers

• Ease collection concerns associated with sellers’ credit-worthiness or

other circumstances (i.e., status as a fund, cross-border deals)

• Greater variety of strategic avenues for settling claims with sellers,

particularly if sellers remain involved in the business post-closing

• In contrast to an insurer’s duty of good faith and fair dealing, such

obligations are not as well defined in the typical business contract

R&W ADVANTAGES FOR SELLERS

• Expedite sale process

• Exit deal with increased funds

• Attract better offers

• Reduce contingent liabilities

• Protect passive sellers

• Reduce or eliminate post-closing indemnity obligations

EXPONENTIAL GROWTH CONTINUES THROUGH 2018

• Larger deals (over $1B) are not uncommon

• More strategic corporate buyers (i.e., not just Private Equity)

• More than 25 R&W insurance companies with over $1B capacity (i.e., limits)

• Increased willingness to underwrite challenging areas including:

➢Environmental

➢Health Care / Life Sciences

➢Cyber / Intellectual Property

➢Employment / Wage and Hour / FLSA

Sensitivity: Confidential

STANDARD AND DEAL-SPECIFIC R&W EXCLUSIONS

• Breaches actually known at

signing (i.e., discovered during

diligence)

• Fraudulent misrepresentations

by buyer (seller fraud is

covered)

• Purchase Price Adjustments

• Covenants

• NOLs or tax attributes

• Pension underfunding or

withdrawal liability

• Interim Breaches

• Civil or criminal fines or

penalties

• Asbestos/PCBs / Environmental

• Claims in violation of sanctions,

FCPA, etc.

• Employment / FLSA / Wage and

hour

• Cyber / Intellectual Property

• Product Liability / Warranty /

Recall

R&W: STRATEGIC QUESTIONS

• Who will be the Insured under the R&W Policy (i.e., Buy-Side or Sell-

Side Policy)?

• Who will bear the risk of no R&W coverage?

• Who will pursue claims against R&W Policy?

• Will R&W Retention be eroded by uncovered losses?

• Will escrow, indemnification or other insurance policy be available?

• How will attorney-client privileged information be protected?

M&A-RELATED INSURANCE PRODUCTS

2013 2017

Policies Bound 54 493

Total Limits 2.1b 16.5b

Premiums 57m 486.1m

2013 2017

Policies Bound 40 434

Total Limits 1.4b 13.4b

Premiums 33.2m 361.3m

All M&A-related Insurance Products R&W (North America)

Source: Aon (2018)

Includes R&W, Tax, Litigation Buyout, Contingent Risk, CFIUS/Reverse Break

Fees, Antitrust/Reverse Break Fees, Health Care, Energy, Successor Liability,

Fraudulent Conveyance, FCPA, Cash Collateral Confirmation (UK)

R&W CLAIMS: STATISTICS

Aon has been notified of 119 R&W claims on policies placed beginning in 2013

2013 2014 2015 2016 2017

21% 17% 16% 15% 4%

R&W Policies

Buy-side Sell-side

• 104 Claims • 34% policies

• 10% policies • 15 Claims

Source: Aon (2018)

R&W DISTRIBUTION OF AVERAGE CLAIM NOTICE FROM POLICY INCEPTION DATE

27% 24% 24% 17% 8%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

0-6 months 6-12 months 12-18 months 18-24 months 24 months+

Source: AIG (2017)

R&W CLAIMS: TRENDS

Timing of Claims: Closing to Claim

Notice

▪ Median:

▪ Mean:

▪ Range:

10 months

9.7 months

3 days to 29 months

▪ Interim claims: 5

0-6

mont

hs

6-12

mont

hs

12-18

months

18-24

months

+24

months

2928

22

19

16 16

13

8

Types of Breaches

Source: Aon (2018)

R&W REPORTED CLAIMS BY BREACH TYPE

20% 15% 14% 14% 8% 8% 7% 5% 5% 5%

0% 10% 90% 100%40% 50% 60%

Compliance with Laws

Intellectual Property

Environmental

70% 80%

Material Contracts

Employee Related

Litigation

20% 30%

Financial Statements

Tax

Fundamentals

Operations RelatedSource: AIG (2017)

R&W FINANCIAL STATEMENT BREACH TYPE

26%

25%19%

17%

13% Accounting rules breach

Misstatement of accounts receivable/payable

Undisclosed liabilities

Misstatement of Inventory

Overstatement of cash holdings or profit

Source: AIG (2017)

Sensitivity: Confidential

Bill Rowland represents significant companies in M&A and other

transactional matters, crafting pragmatic solutions to his client's complex

business and legal issues. Clients have turned to Bill for more than 30

years to achieve their transactional goals. His practice focuses on

domestic and cross-border mergers and acquisitions, divestitures, joint

ventures, corporate governance, and takeovers. He is the coordinator of

the Atlanta Office transactional practices.

Bill represents both public and private companies across an array of

industries, including chemicals, energy, manufacturing, media, telecom,

and technology. Representative transactions include Southern

Company's acquisition of AGL Resources ($12 billion) and divestiture to

NextEra Energy ($6.5 billion), Eastman Chemical's acquisitions of

Solutia ($4.8 billion) and Taminco ($2.8 billion), Cumulus Media's

acquisitions of Citadel Broadcasting ($2.4 billion) and Susquehanna

Radio ($1.5 billion), J.M. Huber's divestiture to Evonik ($630 million),

and Birch Communications' merger with Fusion Telecommunications

($600 million). Bill has led substantial matters for a number of other

clients including Barco NV, Georgia-Pacific, Koch Industries, and Sanofi.

Bill is the former chair of the Business Law Section of the State Bar of

Georgia. He is active in the community and currently serves on the

Economic Development Committee of the Metro Atlanta Chamber of

Commerce. He formerly served on the board of directors of the Alliance

Theatre, the Georgia Council for International Visitors, and the Swedish-

American Chamber of Commerce. He is a member of the Leadership

Atlanta Class of 2009. Bill's work has been recognized in various legal

surveys including The Best Lawyers in America and Chambers USA.

EXPERIENCE HIGHLIGHTS

The Southern Company acquires AGL Resources for $12 billion

Koch Equity Development invests over $2 billion in Infor

Eastman Chemical acquires Solutia for $4.8 billion

HONORS & DISTINCTIONS

BTI Consulting Group "Client Service All-Stars" (2013)

The Best Lawyers in America — mergers & acquisitions (2018)

Chambers USA — leaders in their field, corporate/M&A (2018)

The Legal 500 US (2014)

Georgia Super Lawyers

PLC Which lawyer? — recommended lawyer, corporate/M&A

EDUCATION

University of Wisconsin (J.D. cum laude 1986; Order of the Coif; B.B.A. 1983)

BAR ADMISSIONS

Georgia

WILLIAM B. ROWLAND (BILL)PARTNER

M&A

Joint Ventures & Strategic Alliances Technology

Technology M&A

wbrowland@jonesday.com

Atlanta

(T) +1.404.581.8961

F) +1.404.581.8330

Sensitivity: Confidential