R&W Insurance as a Tool for Strategic Buyers and Sellers Association of Corporate Counsel December 12, 2016

01 02 03 04 Agenda Background and Market Trends R&W Insurance Policy Nuts and Bolts 03 R&W Insurance as a Tactical Tool 04 Conclusions and Q&A

Background and market trends 01 Background and market trends

Overview What does Representation and Warranty (R&W) Insurance cover? How much of the typical indemnity and escrow/holdback framework does it replace? What are typical pricing terms? What are the steps to obtaining a policy? How does the post-closing claims process compare to a typical indemnity claims process? When might it be in the interest of a strategic Buyer or Seller to use R&W Insurance?

Recent Growth in the R&W Insurance Market Concept of R&W Insurance has existed for more than 20 years, but market only began to develop in a significant way more recently Buyers reluctant to rely on what they viewed as an untested product Pricing terms were prohibitively high in many cases U.S.-based buyers would encounter it occasionally in acquisitions involving European targets Significantly more insurance capital available in the last five years Pushed in the U.S. by private equity sellers Desire to pay proceeds to limited partners quickly and without risk of clawback Also becoming popular with risk-averse sellers (founders/individual sellers)

Strategics Making Greater Use of R&W Insurance Use of R&W Insurance by strategic Buyers and Sellers has grown substantially in the past two years Previously 80/20 PE/Strategic; now closer to 60/40 Not just strategic Buyers being mandated to use by PE Sellers

Role of R&W Insurance in an M&A Transaction R&W Insurance covers liabilities arising out of a breach of one or more of the R&W made by a Seller in the purchase agreement This is risk that would ordinarily be allocated to the Seller, subject to negotiated limitations Structure (including Seller indemnity and Buyer deductible) depends on objectives of parties Policies can be designed to supplement Seller indemnification obligations or function as Buyer’s sole source of recovery More commonly associated with mid-market M&A transactions but can be used in connection with $1B+ deals

Insurers Now in the R&W Market 600+ policies underwritten in the U.S. in 2015 industry-wide

R&W Insurance Policy Nuts & Bolts 02 R&W Insurance Policy Nuts & Bolts

Typical Indemnity Framework Private transactions involving strategic Buyers and Sellers historically have relied on a customary indemnity framework Seller makes a variety of R&W to the Buyer about the condition of the business or assets being sold Usual post-closing recourse for R&W breaches is the Seller's indemnity Buyer might insist on escrow/holdback arrangement depending on creditworthiness of Seller Indemnity framework generally highly negotiated

Common Focuses of Negotiation Sellers seek to limit liability Narrowed scope of R&W, qualified by materiality or knowledge Short survival period for many R&W Lower caps on overall liability and larger baskets before indemnification obligation is triggered Higher thresholds before a Buyer can bring a claim Buyers seek comfort they can recover for significant claims Holdbacks and escrow arrangements provide security for a buyer's claims but a seller may be resistant to tie up a significant portion of sale proceeds for an extended period of time

Typical Terms and Conditions (1/2) Coverage is for financial losses resulting from a breach of a R&W Separate from other transactional liability insurance (e.g., tax position insurance and known contingent liabilities) Policy can cover all R&W, including general, fundamental and tax R&W Certain R&W (e.g., environmental) may require additional diligence by the insurer and can affect the premium Typical exclusions include fines, penalties and taxes (even if included in contract definition of damages); terrorism, war, etc.; and pollution Consequential and multiplied damages: follow silence with silence Can provide for longer survival period than in the purchase agreement Coverage is 3 years for general R&W and 6 years for fundamental and tax R&W If there is a particular R&W (e.g., IP) that a Buyer wants to convert to a fundamental R&W, that can be covered by the policy as well

Typical Terms and Conditions (2/2) Insurers generally want both parties to retain some risk, though "no Seller indemnity" policies are possible Typical retention amount is 1-2% of transaction value Risk sharing as between Buyer and Seller for this retention amount can be subject of negotiation, but insurers will often want the Seller to retain some of this risk. Policies typically cost 3-4% of the covered amount inclusive of an underwriting fee paid at the time underwriting commences to cover diligence and document preparation costs Spreads tightening over time

Putting a Policy in Place (1/2) Typically purchased by the Buyer (even if required by a Seller) but costs are often shared between Buyer and Seller (via a purchase price reduction) Insurance broker assists with obtaining initial quotes, underwriter selection and process management as well as policy negotiation Initial quoting Sell-side marketing materials (e.g., Management Presentation), audited financials (if available) and draft transaction documents serve as the basis for quotes Quotes generally obtained within 3 days

Putting a Policy in Place (2/2) Underwriter diligence Typically lasts 3-5 days and primarily consists of review of diligence performed by Buyer and its advisors (on a non-reliance basis) Diligence process culminates in an underwriter call with Buyer and its advisors to walk through any outstanding questions/issues the underwriter may have Policy negotiation and execution Typically signed concurrently with execution of purchase agreement to avoid no gaps in coverage For transactions with delayed closings, coverage may incept at signing providing coverage for breaches of the signing R&W discovered after signing, as well as breaches of the closing R&W discovered after closing (but excluding breaches that both arise and are discovered in the interim period)

Post-Closing Claims Post-closing claims submitted to the insurer but can work with broker to assist with submission Insurer behavior reflects competitive market Post-closing claims submitted similar to other insurance claims Initial indications from policies in recent years suggest claims and recovery rates comparable to traditional indemnity arrangements

R&W Insurance as tactical tool 03 R&W Insurance as tactical tool

Tactical Value to Strategic Buyers Sellers sometimes will mandate a Buyer use R&W insurance “no indemnity, no escrow” Tool to differentiate your bid Improve your perceived net price without raising headline offer price Can be particularly useful when prices in a competitive auction expected to be similar Speed is life - a Buyer using R&W insurance can be ready to execute quickly Offer certainty of value to a seller Address shorter survival periods and lower caps by insuring up to more market levels

Tactical Value to Strategic Buyers Improve overall indemnification profile Opportunities to increase amount (higher cap), lengthen time period and broaden scope, relative to what a seller would agree Improve counterparty credit profile Replace founders or shell companies with investment grade insurance company

Illustrative Buy-Side Implementation Buyer Introduces First Seller Buyer 3 (uses R&W Solution) Buyer 1 (requires escrow / indemnity) Wins Auction Buyer 2 Buyer 4 Buyer 5 If a single buyer in an auction process is the first, and only, potential buyer to introduce the concept it can accomplish the following: Shut down the auction early as the buyer can accept the seller’s reps as is, knowing insurance is in place Arbitrage the cost of insurance against the seller’s desire for a clean exit Achieve a lower up-front purchase price in exchange for Seller obtaining a cleaner exit Or, if you are Buyer 1, prepare to adapt quickly so as not to lose out to Buyer 3

Pros for Strategic Sellers A tool to help facilitate a clean exit Helps to get bidders to the best and final bids Quality of bids may not be impaired as insurance policy may result in equivalent or better coverage than would have been a result of negotiations Allows a Seller to maximize cash proceeds and minimize post-closing indemnity risk Mitigates risk of protracted claims by aggressive Buyers

Illustrative Sell-Side Implementation Seller Introduces First Seller (introduces no/limited indemnity) Buyer 3 Buyer 1 Buyer 2 Buyer 4 Buyer 5 When Seller introduces the no/limited indemnity concept as part of an auction process to multiple buyers, the Seller can potentially mitigate any “discount” that a Buyer hopes to achieve by preemptively doing so, and also ensure a cleaner exit Improve comparability of bids

Hurdles to Utilization by Corporates Unfamiliar terrain for lawyers and commercial teams Can be a change from a company's approach to making (or defending) claims Counterparty risk/balance sheet issues less frequently a concern in transactions involving only strategic parties Time pressure may differ in some negotiations between strategic parties

04 Conclusions and Q&A

What next? More insurers entering a formerly limited marketplace Substantially more insurance capital available to facilitate using R&W Insurance in more and larger transactions Process streamlined such that obtaining R&W Insurance should not slow down a transaction, and may even help get to closing faster More parties are proactively using R&W Insurance as a tool Not just circumstances where a PE Seller mandates it Strategic sellers can use to obtain a clean exit Buyers using proactively to differentiate a bid Watch for Buyer recovery rates on claims Insurers touting how much they are paying out in claims - but how does that compare with historical recovery rates for buyers making claims?

Today's Presenters John Ivascu Jim Marshall Matthew Wiener Vice President, Associate General Counsel and Assistant Corporate Secretary | Forum Energy Technologies, Inc. John Ivascu serves as Vice President, Associate General Counsel and Assistant Corporate Secretary of Forum Energy Technologies, a Houston, Texas based global oilfield products company, serving the drilling, subsea, completions, production and infrastructure sectors of the oil and natural gas industry. Prior to joining Forum, Mr. Ivascu practiced corporate finance, mergers and acquisitions, and securities law with Vinson & Elkins L.L.P. in New York and Houston. Mr. Ivascu began his career prosecuting accounting fraud, insider trading, market manipulation, and market timing matters for the U.S. Securities & Exchange Commission’s Division of Enforcement in New York. Jim Marshall Partner | Baker Botts L.L.P. | +1.713.229.1156 | jim.marshall@bakerbotts.com Jim Marshall represents public and private companies, primarily in the energy sector, in a broad range of corporate and securities matters. Mr. Marshall advises companies in connection with takeovers, including representing both bidders and targets in connection with several high-profile contested transactions, as well as private sales and acquisitions, joint ventures and strategic alliances, many of which involve seeking creative solutions to complex cross-border issues. He also represents issuers and investment banking firms in connection with equity and debt capital markets transactions and counsels companies general corporate governance matters and U.S. public company reporting requirements. Matthew Wiener Senior Vice President | AON Transaction Solutions | +1.713.470.9794 | matthew.wiener@aon.com Matthew Wiener joined the Aon Transaction Solutions Team as the head of its Southwest Region. Prior to joining the ATS Team, Mr. Wiener was a senior associate at Vinson & Elkins LLP, where he specialized in corporate finance and securities law matters, including mergers and acquisitions, private equity, public and private securities offerings, divestitures, and general corporate representation. His practice included representation of a variety of public and private companies, as well as private equity funds and investment banks, with a significant focus in the energy sector.