Материал: Amy C Kläsener

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The Taking of Evidence

covered, in most circumstances and in the absence of the parties’ agreement to the contrary, by the discretionary power to conduct the proceedings and to determine issues of evidence taking.The IBA Rules suggest in Article 6(1) that the tribunal should first consult with the parties before it appoints its ‘own’ expert.

In practice, tribunals will usually strive to obtain the parties’ agreement (not necessarily a formal procedural agreement, but at least a common understanding) as to whether to have a tribunal-appointed expert or experts instructed by the parties. If the parties cannot agree, most arbitration laws and arbitration rules grant the tribunal the power to determine this. Despite this procedural discretion, the tribunal must consider whether its decision to have a tribunal-appointed expert or not to hear an expert at all could violate one party’s right to properly present its case.Another question as to the appointment of experts is not just whether to have party-appointed experts or a tribunal-appointed expert, but often whether to have both.The IBA Rules are a helpful source for the procedure on appointing experts and presenting written and oral expert evidence.

In M&A disputes, different kinds of experts may be retained. One aspect relates to the question as to how to qualify and assess an expert determination that was obtained prior to the initiation of the arbitration as a pre-arbitral step (see Chapter 3 on conflicts between expert determination and arbitration clauses). In most M&A disputes, the claimant claims compensation for certain damages or a price adjustment for which quantum experts will be needed (see Chapter 6 on the role of the quantum expert in M&A disputes). Apart from these kinds of experts, one might also need the assistance of experts on accounting or certain legal fields such as corporate, capital markets, competition, etc., in particular where foreign law is concerned.

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Special Issues in Connection with Warranty and Indemnity Insurance

Amy C Kläsener and Thomas H Webster1

Introduction

Insurance offerings have dramatically transformed M&A transactional practice. Whether obtained by the buyer or seller, insurance offers the possibility of externalising the risks associated with certain representations and warranties. Where difficult issues or the risk-aversion of either party may have blocked a transaction in the past, insurance now greases the wheels.

There have been only a handful of reported M&A disputes involving insurers, but it is already clear that warranty and indemnity (W&I) insurance2 will also affect M&A arbitration practice.This form of insurance has become widespread, and the number of claims raised underW&I policies is significant.3 The overwhelming majority of these insurance claims are satisfied under the policies or settled, but some are disputed. Little data is published regarding the number of claims under W&I policies that result in arbitration or litigation.Anecdotally, the authors have heard that the number of disputed claims, while still small, is rising.

Whatever the figures, this number and the impact of W&I insurance on arbitration practice will increase in the coming years. The impact will be felt in both the transaction phase and any dispute phase. In the transaction phase, the insurers’ and underwriters’ counsel now double-checks the due diligence performed by the buyer and influences the deal terms.4

1Amy C Kläsener is a partner at Dentons and Thomas H Webster is an independent arbitrator at the Law Offices of Thomas Webster.

2Or in US parlance ‘representation and warranty insurance’ or ‘RWI’.

3Estimates range from ca. 18-26 per cent (D. Froneberg, D. Dreier,AIG Studie 2019: Steigende Azahl der Meldungen und höhere Schäden; in, M&A Insurance, Grundlagen – Praxis – Trends (June 2019), p. 36) to 55 per cent (SRS Acquiom, Claims Insights Report (Dec. 2018), p. 16).

4See, SRS Acquiom, 2019 Buy-side Representations and Warranties Insurance (RWI) Deal Terms Study (October 2019).

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Special Issues in Connection with Warranty and Indemnity Insurance

In the dispute phase, the buyer will generally raise claims in respect of insured representations and warranties directly against the insurer5 under the W&I policy (instead of against the seller under the sale and purchase agreement (SPA)). In the following, we refer to this as an ‘M&A insurance arbitration’.Where there are multiple insurers, the buyer may need to raise claims against each, either individually or in a consolidated proceeding. Finally, although there have not yet been any reported cases, it is possible that a buyer may attempt to consolidate insured claims against the insurer under the W&I policy and uninsured claims against the seller under the SPA into a single proceeding.

This chapter seeks to identify some of the possible effects of this development in M&A arbitration and tentative solutions, including points for consideration for arbitration clauses.

We also consider the extent to which these issues are new or whether there are analogies that may be helpful, for instance claims involving indemnification or subrogation. In such cases, the seller often has the right to participate in or assume the right from the buyer to defend against the third-party claim. One of the differences in the case of M&A insurance arbitration is that the insurer does not merely have a duty to step into the shoes of the seller; the SPA and W&I insurance policy generally require that the buyer seek recourse solely against the insurer under the claim procedure in the policy (bypassing the seller altogether). Exceptions apply, for instance, if the claim is uninsured. An M&A insurance arbitration is similar to indemnification or subrogation disputes in that the party ultimately paying has the right to conduct the defence. However, in the typical indemnification or subrogation situation the party ultimately paying is the party responsible for the claim and most knowledgeable regarding the facts and circumstances. In the W&I insurance situation, this is seldom true: the seller invariably has better knowledge of the claims than the insurer.

Additional issues may arise in connection with an M&A insurance arbitration – these include coverage issues under the applicable substantive insurance law and procedural issues where a number of insurers are involved.

Primer on structuring W&I insurance policies

In larger transactions, one typically encounters multiple insurers and policies. There is a limit to the amount of coverage that any individual insurer will underwrite, for example, €100 million. If additional coverage is sought, the insurance is typically structured in layers, with each layer being insured separately by one or more insurers.Together, these policies build what is referred to as the insurance tower.

The insured typically agrees to a deductible.Above the deductible, there is the primary layer, with a first, second or additional excess layers above that. Imagine a medieval tower with a spiral staircase and guards at each landing. If each landing represents the attachment point of the coverage layer above it, the guard at each landing represents the threshold issue to be proved before the insured may proceed: even if the claim is covered by the policy, coverage of a layer is triggered only if the insured proves that the quantum exceeds the attachment point.

5Except as otherwise indicated, the discussion below focuses on the situation where the buyer is the insured and the seller is the party giving the warranty and indemnity.Although W&I insurance is also offered to sellers, the overwhelming majority of policies are issued to buyers in M&A transactions.

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Special Issues in Connection with Warranty and Indemnity Insurance

Insurers in the top excess layer will likely take the position that they should remain undisturbed until all skirmishes involving the lower layers have been resolved, with only the largest and most successful claims able to fight their way to the top of the tower.This can be likened to successive dispute resolution proceedings. However, the insured may prefer for all insurers to come down from their tower and face off on level ground in a single battle (consolidated proceedings) with not only the insured but also the buyer, who in our example is asserting the claims.

Each layer may be insured by a single entity, a group of insurers, or by a combination of such policies. In case of a group, the insured may enter into bilateral policies with each insurer or with a number of insurers. The insurers in a specific layer may be jointly and severally liable in case of a group or syndicate approach or not, in case of individual policies.

Each layer is priced differently based on the risk profile. Premiums for the primary layer (which is more likely to be called on) may be twice as high as those in the higher layers. Within a layer, insurers may act as a syndicate, each insuring part of the same layer of risk jointly and severally.The applicable substantive insurance law will define the types of insurance contracts and the liability of the insurers.

The insurance coverage is typically arranged by a broker on the insured’s side, who negotiates with arrangers on the side of the insurers. If issues of contractual intent arise, for instance whether or not the parties contemplated consolidated arbitration proceedings, many of the parties may not have considered the point at all.

An insurance tower of, say, €300 million might involve anywhere from three to 30 or more insurers, depending on the structure. Although an insured might prefer a simpler structure with fewer contractual partners with a view to future claim handling, the involvement of multiple insurers may ultimately reduce risk for the buyer. Moreover, the party seeking W&I insurance in the final days of a transaction will likely have little leverage to influence the structuring of the tower and may well have to focus on more direct issues relating to the transaction itself.

Negotiation and due diligence

The risk covered by W&I insurance will generally relate to the classic representations and warranties in an SPA.Those representations and warranties are of course usually subject to detailed negotiation and to extensive due diligence. Adopting W&I insurance introduces one or more third parties into that process.

Insurance companies generally engage experienced M&A lawyers to review the due diligence conducted by the buyer (underwriters’ counsel). However, insurers are generally granted access only in the final stages of a transaction and typically have only days, or at most one to two weeks, to complete their due diligence, evaluate the risks, and decide which warranties and indemnities to insure.

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Special Issues in Connection with Warranty and Indemnity Insurance

The questions to resolve will include whether the interests of the transaction parties and the insurer are aligned; whether the availability of insurance reduces the buyer’s incentive to conduct a thorough due diligence procedure,6 and whether insurers improve the fact-finding process because they are a second set of eyes and more professional and objective than the transaction parties.

How the involvement of W&I insurers will influence the transaction process is a matter for debate. Insurers have less of a stake in the transaction being completed and are focused solely on risk. If the seller is the insured, the insurers will generally wish to be certain that all relevant disclosure is documented and appropriately reflected in the SPA and disclosure schedules.With respect to representations qualified by the seller’s knowledge, however, sellers may have less of an incentive to acquire knowledge of relevant facts at the target. Buyers may be less objective than insurers, focused as they are on factors such as opportunities or synergies with their existing businesses.

Whether the W&I insurance is procured by the seller or the buyer, there are issues as to confidentiality7 and expertise8 that must be dealt with.

Do insured sellers grant more generous representations and warranties than they would if they bore the full risk?9 Where the seller procures the insurance, the seller can presumably be relied on to seek to limit its liabilities and therefore its premiums. However, where the risks are insured, the seller may have less of an incentive.Where the buyer is the insured, its insurance will depend on the scope of the warranties and indemnities that it obtains, and it will be in its interest to seek to maximise recoveries. In so-called ‘synthetic’ policies, the seller provides no representations or warranties in the SPA at all, with the insurer covering warranties specified in the policy.

What is clear is that insurers already play an active role in the drafting of the insured’s representations and warranties.W&I insurers bring extensive transaction and claims experience and an interest in clearly defining the insured risks to the drafting process. Clarity in drafting likely assists parties to understand their obligations and decision-makers to resolve disputes under the insurance policy and SPA.

Purchase price adjustments

In many SPAs there is provision for a post-closing or completion purchase price adjustment with, in some instances, an expert accounting determination of the amount of the adjustment to be made (see Chapters 6 and 7).The SPA may address the risk of changes in

6J. Risse & H. Haller,‘Post M&A Arbitration:Warranty & Indemnity Insurance Changes the Scene,’ Baker McKenzie Newsletter, 12 January 2017, available at https://globalarbitrationnews.com/post-ma- arbitration-warranty-indemnity-insurance-changes-the-scene/.

7For example, in buyer-side policies, insurers typically require access to due diligence reports prepared by the buyer’s counsel or other advisors, which may be confidential and privileged.

8For example, although an insurer will in fact rely on an auditor’s report, the auditor’s reports will generally exclude reliance by third parties.Whether insurers will request reliance letters, and whether auditors will grant them, are questions that remain open at present.

9J. Risse & H. Haller,‘Post M&A Arbitration:Warranty & Indemnity Insurance Changes the Scene,’ Baker McKenzie Newsletter, 12 January 2017, available at https://globalarbitrationnews.com/post-ma- arbitration-warranty-indemnity-insurance-changes-the-scene/.

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