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Browsing by Author "Catalano, Tuija I."

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  • Catalano, Tuija I. (2015)
    A typical sale and purchase agreement in an M&A transaction will include a variety of representations and warranties that the seller, and to some extent the buyer, will make as a result of extensive negotiations between the parties. The purpose of seller's representations and warranties when they are combined with indemnification provisions is to provide the buyer additional information about the target of the transaction and a mechanism whereby the buyer can be compensated for damages that are suffered as a result of untrue or inaccurate seller's representations and warranties, i.e. in the event of a breach. Representation and warranty insurance ("R&W Insurance") is a relatively new product in a sense that its use has increased more significantly only in recent years. There are a number of other risk management and allocation tools that parties frequently use, either in lieu of or in connection with the use of R&W Insurance. These other tools include, without limitation, 1) providing security to buyer's ability to recover losses from the seller due to breach of (representations and warranties or) contract by withholding some of the seller's proceeds e.g. via an escrow or other holdback mechanism, 2) providing other security for compensation of buyer's losses with the use of guarantees or sureties, e.g. provided by a third party or a parent company, and 3) providing an incentive for the seller to ensure that certain post-closing actions occur and/or potential post-closing risks do not realize by delaying the payment of a portion of the seller's proceeds with purchase price adjustment, earn-out and/or contingency payment mechanisms. This thesis evaluates some of the alternative risk management and allocation tools, including their relative strengths and weaknesses as compared to R&W Insurance, and identifies the circumstances wherein R&W Insurance may potentially address the parties' needs better or more appropriately. The two different types of R&W Insurance policies, i.e. buy-side and sell-side policies, are also evaluated with respect to the coverage and benefits that they provide in order to determine whether it is advantageous for the parties' to choose one type of policy over another type. With respect to the use of R&W Insurance, this thesis evaluates the ways in which a decision to use R&W Insurance can alter or change the parties' behavior or other aspects of the M&A transaction thereby increasing risk and/or undesirable effects. For example, does the use of a buy-side R&W Insurance policy cause the seller to engage, or provide an opportunity to engage, in riskier behavior since R&W Insurance transfers seller's liability for breach of seller's representations and warranties to a third-party insurer, thereby potentially causing the seller to become less engaged or more dishonest in the negotiation phase with respect to the content of the representations and warranties given by the seller? If yes, what are the potential strategies the buyer can use to deter undesirable behavior by the seller? This thesis also looks at certain qualifiers that parties often use, or at least discuss using during contract negotiations, such as knowledge. Since R&W Insurance is intended to cover unknown risks, parties' knowledge precludes coverage under R&W Insurance policy. In this regard, among other questions, the discussion in this thesis evaluates what the knowledge exclusion means, whether it impacts the buyer' behavior by potentially discouraging continued due diligence efforts by the buyer after signing and before closing, and how concepts such as sandbagging fit into a transaction wherein parties are contemplating the use of R&W Insurance.