Getting the Deal Through - Technology M&A 2019: United States

As they compete with private equity funds in auctions of technology companies, strategic technology buyers are increasingly being asked to purchase representations and warranties insurance and forego the ability to sue sellers for (most of the) damages for breach of representations. Representations and warranties insurance has long been a common feature in private equity M&A. In a representations and warranties insurance deal, sellers may have no liability for breaches of representations and warranties, or may retain a small amount of liability (usually no more than 1 per cent of the purchase price); and for any losses in excess of those amounts, the buyer must look solely to the insurance policy for recovery.

This structure alters the trajectory of negotiations in a technology acquisition. Instead of pushing for higher liability caps for breaches of IP representations, the buyer simply purchases its desired amount of coverage from the insurer. To form the basis of claims under the insurance policy, the buyer will insist on fulsome IP and other representations. Sellers are more likely to accept buyers’ IP representations as is, because sellers will either have no liability or will retain only a small amount of liability, for breach of representations and warranties.