Historically, post-acquisition disputes arising from alleged breaches of seller’s representations and warranties made as a condition to a deal were matters handled directly between the buyer and seller. As part of the closing process, the buyer and seller would often agree to place a portion of the deal proceeds in escrow to serve as funding for indemnification should a liability arise due to a seller’s breach of its representations and warranties. This seller indemnification was limited to a fixed period of time, known as the survival period. In addition, the indemnification was capped by a dollar limit, typically expressed as a fixed percentage of deal value, and was subject to certain named exclusions.
In instances when the buyer sought indemnification from the seller for a breach, any covered liability would be paid out of the indemnification escrow, with any liability in excess of that amount to be borne by the buyer. When the buyer and seller did not agree, the matter may have been subject to a more formal adjudication process, whether through mediation, arbitration or litigation. Although seller indemnification is still prevalent in many deals, the introduction of representations and warranties insurance (RWI) has changed the dynamics of disputes related to breaches of representations and warranties. In mergers and acquisitions (M&A) transactions where RWI is purchased, direct seller indemnification no longer serves as the sole recourse for a buyer. Instead, a third party — the insurance carrier — is introduced into the process. In exchange for premium paid by the buyer or seller, the insurance carrier provides insurance coverage for breaches of the seller’s representations and warranties, subject to coverage limits, a limited period of time during which a claim can be made and certain exclusions. Although in certain deals RWI will fully replace seller indemnification (often referred to as no indemnity deals), in others seller indemnification will be supplemented by RWI.
“With disputes more likely in complex mergers and acquisition and the use of representations and warranties insurance becoming an increasingly integral component of the transaction process, the recently published AICPA RWI guide is a great resource that contains helpful and useful information for professionals who provide post-acquisition dispute services.”
Doug Farrow, Partner, HKA
Read the full version of the AICPA RWI Guidebook, with contributions from HKA Partner Troy Dahlberg.
About the Author:
Troy Dahlberg is a forensic accountant with more than 35 years of experience across multiple industries. He has been retained as an expert witness on more than 100 occasions.
Troy has testified in state and federal courts, as well as in various complex arbitrations. He has been retained on several large, complex commercial disputes to provide consulting and expert witness forensic accounting services, including the Chevron/Ecuador litigation. These disputes have involved both US and international entities with numerous transactions over many years. Troy has served more than 30 times as a neutral accountant, arbitrator and independent expert in disputes, including serving on an international arbitration panel related to issues surrounding discovery, accounting, procedure, reporting, purchase price, working capital, earn out, and ownership.
Troy was a senior partner in KPMG’s forensic accounting, investigations and disputes practice for over a decade. He has had a career-long focus working with counsel, audit committees, corporations and governmental entities to provide forensic accounting, auditing, analysis, and dispute related services. This has including leading numerous engagements related to forensic investigations, financial restatements, and economic damages as well as disputes relating to both joint venture and mergers and acquisitions matters.
Troy specialises in post-acquisition dispute resolution and consulting for both buyers and sellers, as well as his appointments as a neutral accountant and arbitrator. He has provided expert witness testimony regarding complex forensic accounting matters, such as alter-ego and civil RICO. His other testimony includes large matters pertaining to commercial quantum and damages. Troy also serves as a consultant and expert witness in representation and warranty disputes, including a variety of large and complex insurance claims, regarding interruption claims and out of pocket expenses.
Troy is a certified public accountant (CPA) in New York and California and a member of the State Bar of California. He is American Institute of Certified Public Accountants (AICPA) certified in financial forensics (CFF) and accredited in business valuation (ABV) and has been published by them on matters of disputes regarding mergers and acquisitions and representation and warranties insurance.
