Brazil: R&W Insurance: A Useful Tool For Private Equity & Venture Capital Transactions

Last Updated: 5 November 2015
Article by Lobo & Ibeas

A major challenge in M&A deals is to negotiate collection devices and guarantees, such as escrow accounts and security interests. There is a natural tension between the purchaser's desire to obtain maximum protection, and the seller's aspiration to receive the price and cease to have responsibility for liabilities involving the company that is being sold. Such tension is exacerbated when the seller is a private equity or venture capital (PEVC) fund, given the frequent need to wind up the fund within a tight timeframe.

Largely used in the American and European markets, an interesting alternative to overcome deadlocks over collection devices and guarantees has recently been made available in Brazil by insurance companies: the representations and warranties (R&W) insurance. Such insurance covers losses, including litigation costs, suffered by either the seller or the purchaser as a result of misrepresentations in M&A deals (provided, of course, that the insured party was not aware of the misrepresentation at the time of execution of the relevant agreements or closing).

Contingent liabilities known by the parties, even if the likelihood of a loss is low, are generally not covered. The insurer may impose additional exclusions in view of the particularities of each case. And there is often great flexibility for the insured party to negotiate other exclusions it might be comfortable with, which usually leads to reductions in the insurance premium (for example, if the seller does not have many employees and the purchaser is confident that all representations made with regard to compliance with labor laws are true, it may feel no need to insure against the risk of misrepresentations in this field).

Although there is room for negotiation, it is trade usage to have an indemnification cap between 10% to 30% of the value of the deal and to limit the period of coverage to no longer than 3 to 5 years. In most cases the premium for R&W insurance corresponds to 3% to 7% of the amount involved in the transaction, though a minimum fee is almost always charged regardless of the size deal, which may make it economically unfeasible for smaller cases. Preliminary quotations can be obtained by furnishing insurance companies with drafts of the relevant agreements.

To mitigate the risk of fraud and moral hazard, insurance companies hardly ever provide a firm quotation without reviewing the purchaser's due diligence report (and in extraordinary occasions, insurance companies may also get briefly involved in the actual due diligence process). An underwriting fee is charged to cover related expenses.

From the purchaser's standpoint, R&W insurance offers the following advantages: (1) reduction of frictions along the negotiation process (which is desirable, for instance, where the seller will continue to do business with the purchaser); (2) assurance that losses related to misrepresentations will be indemnified (within coverage limits), regardless of the seller's financial condition; (3) agility in the collection of indemnification, without the need to await the end of strenuous litigation with the seller (and/or other guarantors); (4) possibility of making a more attractive buyout offer with the promise to pay the whole price or a large fraction of it upon closing; and (5) better negotiating position to obtain financing for the buyout (given a lower risk of large unforeseen losses that could negatively impact cash flow).

From the point of view of the seller, some of the benefits of R&W insurance are: (1) better bargaining position to negotiate the payment of the whole price (or a large fraction of it) upfront; and (2) reduced exposure to unforeseen expenses with the payment of indemnification.

The main downside of R&W insurance is its cost, which is often higher than the expenses related to the typical collection devices and guarantees. However, such expenses are not the only cost of collection devices and guarantees: sellers generally accept to reduce the price of the deal where purchasers agree neither to deposit part of such price in escrow accounts nor to request extensive guarantees (which is evidence that sellers charge a sort of fee, included in the asking price, to consent to collection devices and guarantees). Furthermore, buyers and sellers are frequently uncomfortable with insurers' extensive degree of interference in the conduct of litigation, which limits the insured parties' ability to settle the dispute or to insist on appealing without the insurance company's consent.

R&W insurance works as a substitute or a supplement to collection devices and guarantees. The decision to buy R&W insurance instead of, or together with, an escrow account, security interests or personal guarantees involves a cost-benefit analysis, which should take into consideration the concrete aspects of each deal. The extensive use of such insurance in transactions carried out in international markets shows it is an important and efficient tool, of which dealmakers, investment bankers and M&A lawyers in Brazil should be well aware.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions