October 5, 2023
R&W Insurance: Take-Private Transactions
R&W Insurance is a standard feature in private company transactions, but this WTW blog discusses its use in take-private transactions involving public company targets. The blog highlights some of the complexities involved when using RWI in these transactions and methods for addressing the issues they present. This excerpt discusses issues surrounding fraud & subrogation rights:
In a typical RWI placement, carriers do not require a right to subrogate against the sellers for any loss the carrier pays out to the buyer, except in the event of fraud of the sellers. This structure mirrors the traditional indemnity construct, which also carves out fraud from the exclusive remedy clause. Carriers rely on the fraud exception to ensure that sellers act in good faith during the diligence and scheduling process.
In a take-private transaction, however, not only are shareholders less likely to be involved in the transaction process, but the disparate nature of a public target’s shareholder base precludes any reasonable avenue for recovery for seller fraud by an RWI carrier. This issue can be addressed in several ways. One such way would be to require that the management team and/or certain major shareholders involved in the transaction and scheduling process agree to remain on the hook post-closing for fraud. This solution gives carriers comfort that the parties negotiating the transaction documents will act in good faith and limits, to a reasonable number, the parties that would be responsible for a post-closing fraud claim.
A second, and significantly more buyer-friendly, potential resolution is to request that the carrier forego any right to subrogate against seller parties for fraud. While, historically, carriers resisted this approach, in recent years many have become increasingly receptive given that, as the market for take-private transactions (and RWI generally) has matured, carriers are gaining comfort that all parties will act in good faith regardless of whether they are subject to recourse for fraud.
Other topics addressed in the blog include the implications of “Big MAC” qualifiers to reps on the due diligence process for insured deals, and the exclusion from coverage of claims brought by public shareholders.
– John Jenkins