This week I am pleased to introduce our guest blogger, Pete Hauser, National Practice Leader at RLI Insurance. Pete is an attorney and is an expert in the world of transactional insurance and reps and warranties. — Emily
No one appreciates more the astronomical amount of work required for an M&A transaction and the complexity of such a transaction than the representations and warranties insurance underwriters. For the sheer volume of material that must be covered in the due diligence review, and the multitude of detailed matters pertinent to the transaction itself, M&A transactions are among the most difficult.
Thus, the importance of the M&A advisory team cannot be overstated—and insurers want to know there is a solid team in place before underwriting the reps and warranties. While not cheap, the expertise is worth every penny. In Part 1 of this article, we’ll look at how to assemble an attorney team.
The attorneys—on both sides of the table—are critical to a successful transaction. There are several things insurance underwriters look for in the M&A deal attorneys:
1. The attorneys from both sides need to be reasonably well matched.
If one side is significantly more experienced, then the weaker side is apt to be overwhelmed and the transaction becomes one-sided, in favor of the more experienced side. For example, a strong buyer’s attorney might utilize greater absolute language in the reps, which would put the seller-side indemnifiers in a more difficult position. Was the seller in compliance with a particular regulatory matter or in material compliance?
A stronger attorney might well take advantage of a weaker one, which might impact the quality of the due diligence performed, the wording of the representations and warranties, indemnification language, and the general terms and conditions of the transaction. The underwriters want to see a constructive and healthy tension between the two sides, as that helps to ensure the reps and warranties are as accurate as possible.
2. The attorneys need to be experienced M&A attorneys, knowledgeable in the minutia with which M&A deals are rife.
The attorneys need to show evidence of good experience and managerial/administrative skills in handling the volume of materials that need to be covered in the due diligence process. They should have seen a number of deals and be familiar with current practices in documentation, deal terms, and supporting bodies of law such as securities, governance, compliance, tax, benefits, labor, contracts, IP, and secured transactions, to name a few.
3. The attorneys need the resources necessary to pull off these transactions.
Buyer’s attorneys need the resources to conduct the due diligence, such as trained associate attorneys, document review software, etc. Seller’s attorneys need to be able to gather materials and understand the target company’s operations, so as to respond to requests for information and to negotiate realistic representations and warranties. These transactions are so large that attorneys without the resources will likely not do a thorough job, and that impacts whether there is sufficient attention to detail to ensure accuracy.
4. The attorneys need other legal specialization in addition to expertise in M&A.
For instance, target companies with extensive international operations require experts in international law and trade. Someone must have expertise in the labor and benefits laws of foreign jurisdictions. Or in intellectual property-intensive targets, the lawyers must have expertise in the relevant area of IP law and its application to the target’s intangible assets.
The quality of work performed by the attorneys speaks loudly. If shortcuts are taken with the due diligence or the reps and warranties are too carelessly drafted, these issues become clearly evident. The underwriters are aware when particular language is inappropriate.
In my next post, we’ll be looking at how to assemble an expert CPA team for an M&A transaction.