Canadian Lawyer

www.canadianlawyermag.com 43 LEGAL REPORT CROSSBORDER Canada imports deal-making insurance As more money has crossed the border, so has the popularity of representations and warranties insurance FIVE YEARS AGO, representations and warranties insurance was a once-in-a-blue- moon sort of challenge for McCarthy Tétrault LLP lawyer Jake Irwin. Last year, says Toronto-based Irwin, it was a factor in about eight of every 10 deals. His hunch — that the insurance was really taking hold — was confirmed by the American Bar Association's yearly Mergers & Acquisi- tions study, which this year was accompanied by an "Indemnification/RWI Cheat Sheet." "I've been at McCarthys for about seven years, and previously I was at an internation- al firm. And, so, I've always taken an interest in what's happening abroad. And one of the things that's helpful to M&A lawyers is we have a great deal of literature and learnings out of the U.S. that we sometimes import up here in Canada," he says. As a deal unfolds for one company to buy another, parties, particularly sellers, will dis- close information about the target: stocks, as- sets and liabilities being transferred. If these so-called representations turn out not to be true (say, financials are misstated, the compa- ny has improper permits or disputed intellec- tual property), some sort of warranty would be in place to reimburse the other party — or so one would hope, based on what the text- book definitions suggest. The insurance — which protects buyers from losses resulting from breaches of warranties or claims on indemnities — can also protect sellers against liabilities such as defence costs and set- tlement. Clean vendor exits and management rollovers are some of the scenarios that can be eased by RWI, both in cross-border and domes- tic deals, says Rory ffrench, a partner at Blake Cassels & Graydon LLP. "There are a variety of situations in which RWI can be beneficial in achieving the objectives of each side on a deal," says ffrench. It's not a new product — nor is it surprising that it would gain popularity, given the alter- native of escrow holdbacks, says Irwin. Not to mention that as the market has grown, pre- miums have dropped: Torys LLP estimated that in 2017 alone, premiums on deals with US$100 million to US$500 million enter- prise value dropped from an upper range of 3.75 per cent to as low as 3 per cent. "Right now, it's a very useful product. It's priced extremely inexpensively and is fairly easy to put in place," says Irwin. "Instead of putting money in escrow for a period of time, clients are willing to purchase the insurance instead — it's just a better economic decision for them." As Canadian RWI brokers make a name for themselves — now fixtures at coffee meetings and conferences — there has been a "knock on effect" across the deals market, says Irwin. "Previously, in Canada, we had indemni- ty caps that were 100 per cent of the purchase price or 50 per cent. And, so, even on deals in Canada that aren't using the insurance, we're seeing those cap numbers come down as a re- sult of the market for insurance dictating that you only need a 10-per-cent or 20-per-cent lia- bility limit. And, so, it's having an effect on M&A whether you use the product or not," says Irwin. "The familiarity of Canadian clients with RWI is generally dependent on how active they are in the M&A market." Rory ffrench, Blake Cassels & Graydon LLP.

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