First Published in The Royal Gazette, Legally Speaking, April 2019
The merger and acquisition market in Bermuda was very active throughout 2018 with the value of deals exceeding the previous year.
Often, the focus is on the commercial terms of a transaction and deal protections intended to give certainty that a matter will complete.
But what protection can a buyer expect if issues arise following the closing of a deal?
Buyers typically want to seek protection if the position of the company is not in-line with expectations, or a liability arises because of an event that took place prior to closing.
These protections can take a variety of forms but will commonly include the giving of warranties and indemnities by the seller.
A warranty is a contractual statement made by one party to another. In this context, warranties will most likely be statements focusing on the party's ability to enter into the transaction, and the condition of the target company or business.
In bringing a claim for breach of warranty, a buyer must evidence the breach and demonstrate the loss flowing from the breach.
A successful claim for breach of warranty will give a buyer the ability to claim damages reflecting the reduction in value of the company or business resulting from the breach.
Warranties also serve the secondary function of encouraging a seller to disclose issues to the buyer.
This is because where a seller provides information that qualifies or evidences that a warranty is not true, they are generally not considered liable as a result.
Where issues are identified through disclosure, the buyer may then insist indemnities are provided.
An indemnity is a promise to reimburse another party if a particular type of loss should arise.
An indemnity is often used to provide a buyer protection from circumstances where a claim for damages may not be available (eg due to disclosure) or where it may not adequately compensate a buyer for reasons discussed below.
In Bermuda, there has been an increase in recent times of a hybrid position where warranties are being requested on an indemnity basis.
This is reflective of the position frequently adopted in M&A deals in the United States but is becoming more prevalent in the United Kingdom.
Where warranties are given on an indemnity basis the buyer has a greater ability to recover sums from the seller if any warranty given by the seller proves to be untrue.
Commonly, under an indemnity the indemnified party can recover their losses, costs and expenses (and any other liabilities) relating to the indemnified matter on a dollar-for-dollar basis (subject to any limitations agreed between the parties).
The onus of evidencing that there has been a reduction in the value of the company or business being acquired (as is required for a breach of warranty claim) is removed from the buyer and the risk for the indemnified event is in effect shifted to the seller.
From a buyer's perspective, the increase in the buyer's ability to recover losses may be attractive, however for the seller a request for warranties to be given on an indemnity basis may provide opportunity to negotiate certain seller protections.
For example, the seller may require a limit on their overall liability to the buyer for breach of warranty and indemnity claims, and any other claims arising from the transaction.
A seller could, as part of its negotiation, also require that certain matters fall outside of the indemnification, and indeed from the risk of a warranty claim altogether.
For example, common exclusions include matters that are within the buyer's knowledge or matters that are of public record.
It should be noted that the giving of warranties on an indemnity basis does not prevent a buyer from seeking separate, specific indemnities on areas of particular concern.
Ultimately, the form of buyer protections sought and given in connection with any M&A transaction is a matter for negotiation and agreement between the parties.
When considering their requirements each party will need to have a view as to the import of the deal to them, their internal policies and own risk appetite.
The parties' relative bargaining power and risk appetite will invariably have an impact on the buyer protections provided as part of an M&A deal, as well as the terms of the deal generally.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.