1. Norton Rose ART and Mergers and Acquisitions Maria Ross Partner - Corporate Insurance

2. Norton Rose n The use of Insurance as a Finance Tool (funding a share acquisition) n Using insurance and reinsurance to ringfence acquisition risk

3. Norton Rose Traditional Transaction Financing n Equity: Rights Issue (listed company only) n Equity: Issue of different classes of shares to particular types of investor n Venture Capital: Restrictions on business, exit provisions, complex shareholders’ agreement

4. Norton Rose Traditional Transaction Financing (continued) n Debt: Third party (usually bank) loan, may be in different tranches, may be syndicated, security over assets of Target n Other Instruments: Loan notes or stock, warrants etc.

5. Norton Rose The Structure n Acquisition of Target’s shares by purchaser (in this case a new company) n Loan agreement from Bank to Newco n No security documentation in relation to Target’s assets n Insurance contract from Insurer to bank

6. Norton Rose The Structure (continued) Particular (but non-essential) features: n Insurer takes small shareholding in Newco and enters into shareholders’ agreement n Premium payment n 100% debt insured

7. Norton Rose Use of Financial Insurance Acquired shares in Target for cash Insurance Company Purchaser (Newco) Bank Issues financial insurance policy to bank as security for loan Small shareholding in purchaser Target loan

8. Norton Rose The Legal Issues n UK insurers - s.16 Insurance Companies Act 1982 prohibits an authorised insurance company from carrying on any activities otherwise than in connection with or for the purposes of its insurance business n Overseas insurers may face similar issues

9. Norton Rose The Legal Issues (continued) n The contract issued by the Insurer needs to be a contract of insurance –promise to pay –insurable interest –element of contingency, either as to the happening of the event or as to its timing –contingency outside the control of contracting parties –payment of premium –commercial effect - transfer of risk from insured to insurer

10. Norton Rose The Legal Issues (continued) n Impact on parties and consequences of a contract not being one of insurance –fine –possibility of increased supervision –status of contract?

11. Norton Rose Insurance or Guarantee? n Distinction between financial insurance and contracts of guarantee n Guarantee is a contract of indemnity but: –must be in writing and signed –is strictly construed against the party who provided it –may be discharged by any compromise between beneficiary and debtor

12. Norton Rose Insurance or Guarantee? (continued) –may not be subject to the doctrine of utmost good faith (including non-disclosure) –no IPT –consideration usual but not essential n Insurance is also a contract of indemnity but: –payment of premium –bargaining occurs between insurer and insured

13. Norton Rose Insurance or Guarantee? (continued) –doctrine of utmost good faith applies –IPT is payable –section 16 is relevant

14. Norton Rose Other Issues n Ensuring premium is paid n Impact of default under the Loan Agreement n Subrogation n Taxation

15. Norton Rose Ringfencing Acquisition Risk Through Insurance and Reinsurance Acquisition Risk - The allocation negotiation between buyer and seller n Due diligence (risk with seller) n Share sale agreement - warranties (risk with seller) n Disclosure letter - (risk moves away from seller and on to buyer) n Vendor protection provisions (risk moves further towards buyer) n Indemnities (risk moves back again towards seller)

16. Norton Rose Ringfencing Acquisition Risk Through Insurance and Reinsurance (continued) Enter the third contender n The insurer –own legal review/evaluation of risk

17. Norton Rose A Transaction - The Risk n Pensions mis-selling –indemnity plus insurance n Annuity book –“ringfenced” via share rights –reinsurance of annuity book –premium was transfer of underlying assets –charged back to target

18. Norton Rose Ringfencing Acquisition Risk SellerPurchaser Target A B Reinsurer Reinsurance Charge of underlying assets “A” shares in target Portfolio transfer of annuity book Benefit of reinsurance and charge Underlying assets

19. Norton Rose Legal Issues n Warranty and indemnity insurance –doesn’t pay out when required? –fraud or deliberate concealment of a material fact –limited recourse warranties

20. Norton Rose Conclusion n Increasing use of insurance in M&A n Trend looks set to continue