Igor Kirman and Ian Boczko are partners and Nicholas C.E. Walter is an associate at Wachtell, Lipton, Rosen & Katz. This post is based on their article, originally published in The M&A Lawyer. Related research from the Program on Corporate Governance includes Are M&A Contract Clauses Value Relevant to Target and Bidder Shareholders? by John C. Coates, Darius Palia, and Ge Wu (discussed on the Forum here); and The New Look of Deal Protection by Fernan Restrepo and Guhan Subramanian (discussed on the Forum here).
Recent years have witnessed a surge in the number of M&A deals that use representations and warranties insurance (“RWI”). According to a recent study, in 2018 to 2019, 52% of private company transaction agreements referred to RWI, up from only 29% in 2016 to 2017. [1] Yet, despite its dramatic growth in the private company deal market, RWI has so far been almost entirely absent from public M&A transactions (“public company deals”) in the U.S. The question is why.
One key difference between private and public company deals is the availability of post-closing recourse for the buyer. In private company deals, which typically involve the sale of a company by a small number of shareholders or the sale of a subsidiary by a large company, buyers expect sellers to indemnify them for breaches of reps. In contrast, in public company deals, where target companies are usually owned by many shareholders who trade in and out of the shares in the public markets, there traditionally has been no post-closing indemnity, in part because of the view that there would be no one left to pay it. In recent years, we have also seen a rise in a type of blank check company called a special purpose acquisition vehicle (“SPAC”), which raises money in an IPO for the purpose of acquiring other companies. [2] Most “de-SPAC” transactions, whereby the public SPAC vehicle buys a private target, thus taking the target public, do not involve a seller that provides indemnification recourse (for a number of reasons, including dispersed share ownership). Thus, SPAC deals are another category, similar in some respects to a “public deal,” where RWI can fill an indemnification gap.
