• Why Representations and Warranty Insurance Is the Perfect Tool for Bankruptcy Sales
    POSTED 9.29.20 M&A

    I know of a company that was on the verge of being bought for $100M. Then COVID-19 came in, the deal fell through, and now the business, forced to go through bankruptcy, is selling its assets for $20M.

    This will not be a unique case. In the coming weeks and months, expect a growing list of companies looking at bankruptcy as their way out due to the ongoing economic effects from the pandemic.

    Unlike past downturn-related bankruptcy sales, there is a very valuable M&A tool that can be brought into the transaction that greatly benefits both Buyers and Sellers (also known in these cases as debtors):

    Representations and Warranty insurance.
    As Bryan O’Keefe, Gena Usenheimer, and James Sowka, partners at Seyfarth Shaw, put it in their recent article, “How An M&A Tool Can Benefit Bankruptcy Sales”:

    “When properly utilized, reps and warranties insurance can increase the value of the distressed asset while simultaneously providing the asset purchaser with a backstop on the promises made in the purchase agreement.”

    R&W coverage transfers the indemnity risk away from the Seller to a third party – the insurer. And the Buyer simply goes to the insurer with a claim for damages from any breaches post-closing. It’s a win-win for both sides of the transaction.

    In bankruptcy deals covered by R&W insurance, the Seller’s company and/or its assets are more valuable, which gives them more cash to cover their debts. The simple reason why is that an asset backed up by an insurance company is more valuable to a Buyer than an asset that is bought as is. They can sell for more, simply put.

    For Buyers, this coverage gives them protection and peace of mind that if something goes south and there are unknown breaches of the reps and warranties of the Purchase and Sale Agreement, they won’t have to go after the debtor (which doesn’t have funds to cover the damages because of their financial situation) for relief because the insurance company is ready to go.

    This is vastly different than how business is usually done with these 363 sales. In the past, the mode was “as is, where is.”

    It’s kind of the like buying a used car “as is”—it’s up to the purchaser to have a mechanic check out the vehicle to make sure it’s in good running order and there are no hidden issues. When a car warranty is added to the deal, not only does it cover repairs if something breaks down unexpectedly, but the owner can also actually increase the selling price.

    With a 363 sale, the burden of conducting due diligence of the target asset is on the Buyer, and they often have a shortened timeline to conduct it. Things can be overlooked. R&W coverage acts like the car warranty.
    As Bryan, James, and Gena say in their article:

    “Most 363 sales are ‘as is, where is’ – a bankruptcy term of art meaning that the asset purchase agreement has no indemnities and the debtor is not standing behind the usually limited reps and warranties contained in the agreement.”

    “While the bankruptcy court’s 363 sale order wipes out third-party claims against the assets, it does nothing for so-called ‘first party claims’ – that is, the reps and warranties made between the debtor and buyer around the overall state of the assets.”

    R&W coverage is more affordable than ever. It causes no friction or change in dynamics in the deal; in fact, it makes negotiations smoother. And it’s now available for middle market companies. This has meant its widespread adoption in some M&A circles.

    PE firms have been on board with R&W insurance for several years now. And SPACs are warming up to R&W as well. Now it’s time for bankruptcy sales to join in.

    Why haven’t bankruptcy attorneys already been using this unique insurance product? They simply were not familiar with it.

    You should know that insurance companies have departments that specialize in R&W coverage exclusively for 363 sales, which means not only are they experts in the field but also are coming in with aggressive pricing for the policy, which is a relief of companies in trouble, who face higher legal and other fees in general.

    As bankruptcy attorneys realize these and all the other benefits of R&W coverage, watch for its use to increase as the coming wave of bankruptcies crests in the near future.

    To find out how this specialized type of insurance can be a game-changer in your 363 sale or more straightforward deal, contact me, Patrick Stroth, at for all the details.

  • Sander Zagzebski | M&A Outlook for the Rest of 2020
    POSTED 9.22.20 M&A Masters Podcast

    Back in May, Sander Zagzebski maintained that COVID-19 was not a black swan. He even saw a silver lining in the pandemic in the form of opportunity for savvy players in the M&A world to make significant gains.

    In this episode we talk about his original prediction and how it has manifested today.

    Sander, of Greenspoon Marder LLP,  says the current economic crisis is similar to what happened in 2008/09 but also quite different in key aspects, including the cause and how the presence of trillions of dollars of dry powder means there is actually money to invest this time around.

    Sander shares how he’s advising his M&A clients right now, and we also talk about…

    • What he thinks will happen in Q3
    • Why companies can’t “wait out” the pandemic – and what they must do now
    • How to account for legal and regulatory uncertainty going forward
    • A unique insurance product – perfect for the pandemic – that transfers risk
    • And more

    Listen now…

    Mentioned in this episode:



    Patrick Stroth: Hello there. I’m Patrick Stroth. Welcome to M&A Masters where I speak with the leading experts in mergers and acquisitions. And we’re all about one thing here, that’s a clean exit for owners, founders, and their investors. Today I’m joined by Sander Zagzebski, partner of The Corporate and Business Practices Group of Greenspoon Marder. Greenspoon Marder is a full-service business law firm with over 200 attorneys in 26 locations throughout the United States and has been ranked consistently among American lawyers Am Law 200.

    It’s one of the top law firms in the country since 2015. Sander wrote an article back in May for C-Suite Quarterly, and it had the subtitle taking advantage of the disruptive opportunities during the coronavirus pandemic. And this was one of the first articles out there that was pointing to a silver lining in the pandemic. And I’m pleased to have Sander here as my guest to discuss this piece, which is both, it will be linked on our show notes. But it is contrary to conventional wisdom.

    And when you consider the time that this came out, the first week of May, we were just getting, you know, into that settle in place, the fatigue was coming in, the stock market may have been bouncing off of the March lows, but still, there was a lot of uncertainty. And Sander’s article has a lot more credibility now because since that came out in May, there have been at least a dozen other prominent authors out there putting out very similar predictions for not just economic recovery, but recovery in mergers and acquisitions. And so I’m pleased to have Sander here. Sander, welcome to the podcast today.

    Sander Zagzebski: Thank you, Patrick. Appreciate the invite. Lawyers love listening to themselves speak and I’m no different. So thanks for having me.

    Patrick: Well, that’s why we’re not short on content with you. Now, before we get into this article and how you saw the trend, which is a unique way that you looked at it, let’s talk about yourself real quick. Okay, how did you get to this point in your career?

    How Sander Got to Where He is Today

    Sander: Yeah, I’m a, I’ve been practicing as a corporate securities M&A private equity lawyer for 23 years. I started in a large regional firm and a large international firm. But I’ve also run my own law firm for six and a half years. And so more recently, kind of bounced back up the food chain a little bit and joined Greenspoon Marder, which is an Am Law 200 firm, meaning it’s one of the 200 largest law firms in the country. And I, you know, one of the corporate partners and I head up the corporate practice on the west coast.

    It’s, you know, I got here, I guess, in large part because I’m a little bit adventurous. I like to try new things. And one of the things that we do very well is we sort of follow the entrepreneurs and, you know, try to harness their entrepreneurial spirit. And so we get involved in industries that maybe some of our competitors don’t pay as much attention to. Technology that is pretty saturated. But, you know, hospitality, entertainment, new media, Cannabis. We’re probably, we probably have the largest cannabis practice of any of the Am Law 200 firms.

    You know, blockchain digital assets. And we try to, you know, it’s more fun to go where the action is, and these are some of the places where the action is. So but from a skill set level, we are industry agnostic, and I do, you know, I do probably 40, 50% mergers and acquisitions. And my, you know, in a given year, maybe a third capital raising transactions. And, you know, the rest is kind of a mix of joint ventures, strategic alliances, other kind of significant corporate matters that don’t fit neatly within one of those two boxes of, you know, PE M&A capital markets type stuff.

    Patrick: It’s safe to say that Grinspoon Marder is not a boutique, but it’s got that feel and responsiveness and passion of a boutique but with all the leverage and all the services and all the resources of the larger firms.

    Sander: Absolutely. I love it when you sell me.

    Patrick: Well, let’s go over this transition over to your piece, okay? Because that was one of the other predictors out there, the reflex prediction out there was there’s going to be just the M&A field will be exclusively distressed, you know, bankruptcies and distressed assets out there. And that’s all that we’re going to see across the landscape.

    And in your piece, you go ahead and you go contrary to conventional wisdom, and you just say, you know, unlike what a lot of people are saying, this COVID-19 this is not a black swan, okay? And, you know, you do this uniquely because, again, you didn’t have some positive thinking, hopeful aspirations out there. You actually looked at the past and found key markers in the past that could lead to what could happen in the future. So let’s talk about that please.

    COVID-19 Not a Black Swan Event?

    Sander: Well, sure, you know, it’s, I’ve been doing this long enough that, you know, I certainly can still remember the financial crisis of 08 and 09 and can draw parallels that I’m sure many others are drawing as well, you know, with the current situation. And, you know, Professor Nassim Taleb who actually coined the phrase, the black swan, in his book that came out, I believe, around the time of the financial crisis.

    I think it was either right before or, you know, even during the financial crisis. You know, this term black swan has kind of become something that means a little bit, it means whatever you want it to mean, right? It’s, and a lot of people use it as just sort of a, you know, what’s the Black Swan event of this year? Well, Taleb himself, you know, the idea of the black swan is that it’s a highly unusual event. It’s something that’s really unforeseen and one that can have very, very dramatic consequences.

    And I think from his perspective, as an investor, he’s looking at it more from the perspective of risk, right? Fail risk and the like. But he, I was kind of, I found it curious because I saw him talking about the Coronavirus and the government’s responses to the Coronavirus. And he resisted calling it a black swan. And the reason was, he said, Look, a pandemic is a highly predictable event. We’ve had these before. We know what these things are all about. So in other words, he sort of chafed at the notion that this would be thrown in as a black swan.

    Now, part of his perspective there candidly, may have been because he has previously written about the risk of a global pandemic and kind of lumps himself in with Bill Gates and some others who have talked about a pandemic as something that systems, you know, his whole concept, I’m not, I haven’t read all of his books, but this whole antifragile concept for you, right, where you want to build some robustness into systems. You know, one of his observations is that, hey, you know, we have this interconnected global economy with supply chains and the like, and it doesn’t take a whole lot, you know, for it all to come crashing down.

    But from my perspective, you know, looking at the parallels between the financial crisis of 08 and 09 and the current situation, once shutdown started to happen, it seemed obvious to me that there was going to be a dramatic economic effect. And we could look to 08 and 09 to maybe remind us about what was going to come next. So that’s kind of the premise there.

    I’m not sure really think too much about whether it would be called a white swan versus a black swan. You know, that doesn’t really do too much in my world or yours. It’s really, you know, how significant is this? You know, what are the winners or losers going to look like? And then how do we, as deal professionals, position ourselves to provide the services to our clients that we would like to provide going forward? What are they going to be doing? And what are we going to be doing to help?

    Patrick: What were some of the steps that were taken or not taken in the wake of 2008, 2009 that served to be lessons for investors and deal makers now?

    Lessons Learned From the 08, 09 Recession

    Sander: Well, one of the things that really struck me about 08 and 09 was that the dramatic shift in sentiment, particularly in the financial services industries, but really, across the board was so significant that it really created a lot of opportunities. And when we look at 08 and 09, at least when I look back at 08 and 09, there’s a lot of writing about the folks that predicted, to some degree, the crash and the decline in real estate prices, the resulting impact it would have on all sorts of different financial products that were associated with real estate.

    So, you know, we focus on books like The Big Short, right? And the movie that came out about the same events. We look at, you know, folks like Kyle Bass and others, and there’s a bunch of folks that figured out how to make some very timely bets before the crisis to profit from the decline, but I think there’s been a lot less in the way of press devoted to the folks that came in, I can’t remember who the famous investor that said, you know, the best time to buy is when there’s blood in the streets, right?

    There was certainly blood in the streets in 08 and 09, and some people were able to take advantage of that opportunity and make some pretty significant gains. So, you know, in the article, for example, I talked about Oaktree went in and they put a really significant multi-billion dollar bet on corporate debt.

    And, you know, one of the co-Chief Investment Officers of Oaktree, I guess, was quoted as saying Look, this is either the greatest buying opportunity in my career or the world is gonna end. And he kind of reasoned if the world was gonna end, you’d have bigger problems anyway. So he decided to take advantage of the buying opportunity on behalf of his clients and did quite well. And there’s a couple of other examples of people that made, investment professionals have very timely bets. I think Leonard Green made a minority investment in Whole Foods.

    Again, and there was I think the other one that was significant and it was reported by the New York Times is that essentially the, one of the, if not the biggest wins in private equity history was this bet Apollo made on the chemical company. And what I think is so interesting to me about both of those moves is that these were completely out of the financial services sector. These are just folks that took advantage of an opportunity that presented itself because of the crisis, right?

    I mean, it was, Leonard Green had an opportunity to come into Whole Foods, presumably did the analysis and determined that this was a good time to get in at the right price. Similarly, Apollo’s is interesting because it was a distressed transaction and that they went out and acquired a lot of discounted debt and then pushed that company which is the third-largest chemical company on the planet, pushed them through a bankruptcy and then came out with an enormous return when they converted their bonds into equity.

    So to me, that was really, you know, the reason for the article, it’s okay COVID-19 has everybody inside, you know, doing Zoom happy hours and learning French or whatever it is that you do when you have downtime. But let’s think about what’s going to happen. Let the talking heads deal with good versus bad policy.

    You know, what’s going to happen in the world and how are dealmakers and deal professionals going to cope with it? What’s going to happen next? And where it really struck me that, you know, the unsung song of 08 and 09 are the people that came in, went long at the bottom and really profited. Everybody’s heard about The Big Short, people that went short at the top, and took it all the way down. But you don’t hear nearly as much about the people that came in and saw the opportunities. And so it just strikes me that we’re going to start seeing people making moves because they’re going to see those opportunities.

    Patrick: So I think the other contrast with the last recession, and I’m stealing this from somebody else, but the last recession, you know, there are all these opportunities, but nobody had money. Now we’ve got a lot of money and we’re waiting to see where the opportunities are. I mean, this was not an issue in the financial system or anything, and in the areas that you and I both work with private equity.

    There were articles about their trillions, plural, of dry powder that had been accumulating and they’re waiting to deploy it. Well, that didn’t disappear. I mean, they’re extending more resources to support their portfolio companies, but they still have quite a bit. So I think it’s just they’re going to start finding things at the right price.

    And I sincerely believe private equity is going to be the ones that lead us out. I also think that, you know, even looking back at those ventures that were tried, I mean, they were multibillion-dollar investments. And back then, a billion dollars was still pretty significant. Now, you know, you’ve got companies doing that on a strategic acquisition and it’s no big whoop.

    So there are those types of things out there. And also, I just think that, as you said, all the focus was on the people that shorted and watch everything go down, whereas every, you know, a lot of smart money was coming in, you know, buying up things at a discount. I had also pointed just recently in Silicon Valley, there has been just short of a billion dollars being raised by companies, multiple companies, five or 10 a day, but is totaling 700, to a billion dollars for the last five days, last two weeks.

    So companies are raising money, there is activity that’s happening. And so if you fall into the trap of, like you said, listening to talking heads or all the other noise out there, you’re going to join the group out there and start getting depressed. Whereas if you focus on these opportunities, I sincerely believe they’re out there. And, you know, there’s just going to be more, you just have to look for it.

    Sander: I think that’s, right. I mean, I would also just observe, and I tried to mention the article, right? It’s easy to draw analogies or parallels, but sometimes you can take it too far. And the financial crisis was just that, right? It was a financial crisis driven by, you know, the precipitous decline in real estate prices.

    And, you know, as it had that sort of snowball effect. And here COVID-19 is still COVID-19, right? It’s still a pandemic, the virus is still out there. And, in fact, what hadn’t happened at the time I wrote my article, but of course, has happened since is, you know, the stuff out of Minneapolis, right? George Floyd, the protests and all, you know, the focus on police brutality and minority rights.

    And, you know, these are all, again, very good things and worthy to be talked about. What I think COVID and some of these other things now sort of amplify, potentially at least, is the legal risk, if you will. The regulatory landscape. We don’t know, for example, whether, you know, private equity funds that have portfolio companies that took relief loans from the government. Is there going to be a law that tries to attach some sort of penalty? There’s already been some public shaming, if you will, of folks that have larger financial backers, you know, taking some of these relief loans.

    Are you going to see something along the lines of, you know, the congress tries to, you know, once again deal with, you know, screwing around with the carried interest and how it’s taxed or something that they want to do in order to try to, in their minds at least, level the playing field between the, you know, the private equity professionals, you know, the top one-percenters as they’ll probably call it, and the entrepreneurs. So, I think that’s actually where things get a little more dicey is goalposts are going to start moving and we really don’t know exactly how that’s going to shake out, right?

    Patrick: Yeah. Well, what are you telling your clients? If there are, those that are anticipating or were looking for an acquisition target or were looking before but now are, you what are you telling them?

    Sander: Well, I think the nice thing about it is when you’re a lawyer, a lot of the stuff I’m doing is all just for fun. It’s not like people come to me for my economic advice. But the, what I’m telling people is to essentially what I’ve told people in good times and in bad, which is still be prudent, right? I mean, in other words, the, everybody that’s out there and has looked at deals and as analyzed deals, has been trained to look for the variables and handicap those, right?

    And so, we’re in a situation, it’s certainly uncharted territory to most of us. I mean, I don’t think the, you know, the quarantines, the shutdowns, love them or hate them, I mean, I’ll let other people talk about that. But certainly, it’s one of the most, if not the most significant responses to an event that we’ve seen in peacetime in our history of our country, right? So big things have happened and it’s causing disruption.

    And what I tell clients and anybody else who is interested in my opinion, it’s simply to say, opportunities are always created in this environment, right? And that’s really what the lesson was from 08 and 09. It wasn’t just the opportunities that were created before the event, but there’s opportunities created in the event. And so, you have to look at whether, you know, you can acquire debt positions in order to gain a controlling interest in a target, or whether, you know, you can make a strategic acquisition, provide liquidity to somebody in your supply chain.

    Whether you can, there’s a whole bunch of different things that people can and will look at in these types of environments. And so, and it’s, you know, it’s a good time to do it. And people who have that dry powder, as you mentioned, the private equity funds. I do think they are, you know, I doubt that they’re just going on vacation waiting for all to end. I think the good ones are already looking to see how can we benefit from this? How can we lead us out of this crisis?

    Patrick: Well, the other thing this highlights to us just when we get a big disruption like this and a shock to the system, suddenly people start worrying about risk again. Suddenly those antennae go out a little bit and they’re a little worried about it. And so when they used to not worry about risk and figure, I’m an entrepreneur and we’re going to go and we’re going to hang in bang with them, and you know, good things will happen if we think positive. Now, I think there’s going to be more of a focus and some value associated with transferring some risk or limiting risk, however, you can do it.

    And I bring that up because there’s a lot of what we do in our practice with rep and warranty insurance, is we remove the risk exposure between buyers and sellers and transfer the risk that they have to a third party, which is an insurance company. And in almost every case, the insurance company has deeper pockets than both players combined so it’s a real safe place to go and transfer risk. Because of your practice with M&A, share with me whatever experience good, bad or indifferent you’ve had with rep and warranty on deals.

    Sander’s Experience With Rep and Warranty

    Sander: You know, we do a lot of M&A in the middle market space. We’ve been particularly active in cannabis in recent months. And as you and I have talked about, right now, M&A, insurance, rep and warranty insurance isn’t an option in the cannabis space. But likely with some legal changes and regulatory changes will start to become an option.

    So in those deals, obviously, we’re not looking at M&A, or not looking at rep warranty insurance, and we’re dealing with everything your old fashioned way, right? Just hyper-focused on the language of the reps, hyper-focused on the schedules and the indemnities and the baskets and caps and escrows of their escrows and that sort of thing. In non-cannabis we dealt with rep and warranty insurance a handful of times in recent years and the, my experience has frankly been, I would say, guardedly positive.

    And the only reason I say guardedly positive is I have actually personally never, on one of my transactions where I was lead counsel, I’ve never had occasion to make a claim against, you know, against an insurer. So perhaps that’s because my team is still very focused on schedules and making sure that, you know, when they make reps and warranties, they’re not going to create a scenario where there’s actually any reason to have a claim.

    So perhaps that’s, I don’t know if that’s good or bad, but my experience has generally been positive in that the, as long as you get in early, you talk about the rep and warranty policy and how it works. In my experience, it was, actually, I think, in all cases, it was a private equity relationship that was driving the rep and warranty insurance. But as long as you get in early and you work the process, it hasn’t slowed down deals, it’s you know, everything is worked out the way it’s supposed to. I think your industry is getting it, starting to get it right.

    Patrick: I appreciate it. There are two big points that you have in that response. The importance of introducing the concept of rep and warranty as early as possible the deal, it can always be removed. I mean, my wife does that all the time where she’ll order a bunch of stuff, like we can always remove it, so don’t worry about it.

    It just slows down the deal of all of a sudden you’re, you know, 10 yards from the goal line and now well, let’s introduce this new process that the parties might be unfamiliar with. And so the sooner you do it, the better. So that’s usually helpful. Yeah. The other side on a claim side, I’m pleased you haven’t had one, the one thing that’s fearful for us insurance people is in order for, you know, the policy to quote-unquote work, a claim has to get paid. That means something bad’s gonna happen.

    And so while we stand by, you know, all the reports so far is that rep and warranty, and actually, cyber liability insurance are the two insurance products that really deliver on the claims payment, less hassle and all that. So they’ve had a very, very solid track record, which is good. But at the end of the day, I always kind of like where, well, I’d rather have an instant be reported and clients like, well, it amounted to nothing, eventually turned out it was okay. But boy, I felt good that I had this behind me just in case. So it’s kind of nice that way.

    You Need a User-Friendly Professional 

    Sander: Well, let me, if I can cut in real quick, Patrick. So I think what I would say is it’s always important in a major transaction. And, you know, as an aside, I think when you’re doing M&A, for most of us, if it’s in the middle market, it’s a major transaction for your client even if it’s not necessarily a major transaction for your firm, right? I mean, generally speaking, these entrepreneurs, this is their business.

    This is their recent life’s work if not their entire life’s work. And so for them, rep and warranty insurance is a significant benefit to them to just sleep better at night knowing that their deals close and they have something behind them if something, they have an insurer behind them if something goes wrong. For deal professionals, I think the real key is interacting with experienced folks like you when it comes to products like this because even though I’ve done a number of times in my conversations with you, I’ve learned more about it and how it works.

    And you really, I think you need a user-friendly professional to help keep that piece of the deal on track, right? Because, again, it’s one of those things where the deal professionals don’t necessarily think of it as, they don’t plug the insurers into the whole deal. They do their deal and then they like to sort of dump it all on the insurers. But the reality is if you’re on a deal team and you’re getting a deal done, you’ve got to loop in those folks early and proactively because then, number one, you don’t have any surprises, number two, you have a better product. In other words, you have a much higher likelihood of a successful claim if one needs to be made.

    And then number three, you don’t have any problems getting the deal done, right? You don’t run into any issues at the 11th hour that caused you to have to delay closing or reprice or do whatever. So that’s what I think is the good reminder for entrepreneurs is, you know, rep and warranty insurance in particular, highly specialized, it’s a niche market and you need to have the experienced professionals helping you. And it’s worth the investment and it’s worth, you know, getting them on the phone early.

    Patrick: I’m going to stop it there and just say I couldn’t say that any better. So we’ll go with that. Those are words to live by, folks. Sander, as we’re going through, we’ve had this, you know, sell in place now for a while. We’ve been seeing a kind of as we’re recording this, we’re opening up and then we’re having some, you know, we’re stubbing our toes, you know, Texas, in particular, and some other places, as the rollout isn’t going as planned and cases are rising. So there’s a lot of fear out there. Give me your idea just based on where we are today, and this is midway through 2020, what do you see for M&A?

    Sander: I think it’s going to accelerate, for sure. I think, look, you know you’ve had at least one pretty sizable transaction that was reported. You’re in the gig economy space and you’re delivering product to people that are holed up in our homes right now, your valuation has certainly benefited from this, right? And, you know, the door dashes and the like. The, like it or not, as hard as it will be for our policymakers will try to create rules to mitigate this, but there will be winners and losers and always are in these sorts of things.

    It’s just an unfortunate fact of life. And so, I think when it’s amplified like this, and this one, I don’t think I’ve seen anything amplified to this degree, right? I mean, if you’re a Spinal Tap fan, right, this one goes to 11. This is going to be because, only because, you know, major, the world’s major economies just stopped for a couple months, right? And even as we get back, moving again, it’s very uneven in how it’s happening and there are likely to be additional waves of the virus, right?

    It’s likely from what I’ve read, there’s seasonality. And like I said earlier, I think there’s going to be a lot of tinkering with the law. So to me, what would slow things down is legal and regulatory uncertainty because certainly, if you’re a private equity fund, you got money, you’re looking around, you just want to make sure that you don’t do something that turns out, in hindsight, with legal or regulatory changes to be a really dumb move.

    But I think what is driving it is frankly, just going to be pure necessity. I mean, things are so different now. You know, huge numbers of tenants, both residential and retail haven’t paid their rent in the last X number of months, you have a huge number of debt payments that have been missed. We got a lot of very significant bankruptcies. I read that Microsoft is going to close virtually all of their retail stores. You can just see how this stuff starts to ripple, and so you will have folks that can come in and buy an asset that has been devalued temporarily.

    And I think it’s, they’re not all going to be, you know, record-setting valuation deals, but I think the volume is going to go up significantly, probably starting in q3, but certainly by q4. I gotta think we’re going to be just seeing a whole lot of action, as will you, right? It’s just looking at the macro aspect of it, right? I mean, because, again, you’re gonna see a lot of, we’re seeing big bankruptcies already, a number of significant ones, right? And so, those are going to be dealt with in some degree, which will involve significant strategic transactions, whether it’s M&A or something else, right?

    But it’s so, to me, it’s so big. It’s so significant. It really, it affects virtually everybody, right? Virtually all companies are going to be affected to some degree. And so the question is, do they just sit still and wait it out? Some will. But I think a lot of others will realize that they have to either combine with somebody, shed some weight, right? A lot of stuff is going to have to happen because it’s just so significant. There really isn’t gonna be an option to wait it out for a lot of folks.

    Patrick: There are companies that are good before the pandemic, they’re probably going to be really good after. And coming from California where you guys are or up here in Silicon Valley, I mean, literally every company here is for sale. And it’s just a matter of time and is going to come around. So we will see what happens, but Sander, again, I greatly appreciate the piece that you put and just great perspectives here. And it’s always nice hearing, you know, from a variety of forward thinkers out there. Now, how can our audience find you?

    Sander: Sure. Well, and by the way, thank you for reading it and paying attention. It’s always nice to know I’m not just writing to an empty audience, right? I have at least one fan. Listeners can find me certainly at our website, Greenspoon Marder. Just google Greenspoon Marder or go to First name Sander last name Zagzebski with a Z, ZAGZEBSKI. So listeners, it’s not too hard to find me on the website. And then you can also, you can reach me by phone 323-880-4525 is my office line. Email is I think I’ve given you everything. The easiest way to just get online. That’s how you find everybody these days.

    Patrick: If you went to the website and they looked up attorneys by name, are you the only Z in your office?

    Sander: No, no. Look, we have 240 lawyers so I think we have four or five people with Zs. Actually, my, the head of our entertainment practice in Miami, Lesley Zeagle is actually behind me. I can’t even say I’m the last person on the list. But yeah, if you click on the Z on the far right, you know, you’re not gonna, you’ll find me pretty fast. I’m in Los Angeles. So, you know, run the corporate practice on the west coast and, you know, M&A, strategic transactions, private equity venture, that’s our life, right?

    That’s what we’re doing. We’re not going to stop doing it just because times have gotten tough because a number of the folks in our office, including myself, have done quite a bit of deal-making when times are tough and I think you will too, Patrick, because it’s, you know, your world, M&A, you know, in the M&A world, rep and warranty insurances is kind of become the standard for certain types of deals.

    And the only thing I would say to your listeners is, because I’ve sort of made this mistake myself and you kind of, you called me out on that a little bit is it’s not, the product is getting good enough and the process is getting efficient enough that it makes sense for deals that are much smaller in size, then, you know, we would have considered rep and warranty insurance for say two, three years ago, right? So if you got any deal that’s over, what would you say people should call you if the deal is over 20 million? Or what’s the

    Patrick: Over 10 million? I mean, it’s that small. And saving on a 500,000 or a million-dollar escrow by having a policy instead. That’s a lot more for some than a $100 million deal.

    Sander: Oh, 100%. I think it smooths things out, right? It doesn’t obviously eliminate the need to have good deal professionals put the deal together. Certainly, as with anything in insurance, you’d rather not be making a claim than having to make a claim. And so you still need to run through the process, but your clients, in particular, will love having that assurance. My experience has been the private equity folks have embraced it. And since they tend to set the deal terms for the industry and determine what’s quote-unquote market or quote-unquote standard, it’s now de facto standard to deals that are, you know, in the middle market.

    Patrick: Great. Sander, absolute pleasure having you. We’ll be talking again.

    Sander: Sounds good. Thanks, Patrick.

  • Why Rep and Warranty Insurance Is Perfect for SPACs
    POSTED 9.15.20 Insurance

    The special purpose acquisition company (SPAC), sometimes called a “blank check company,” is the newest darling of the stock market for going public because it’s so much easier, quicker, and cheaper than a regulation-heavy traditional IPO.

    As you know, SPACs are created for the sole purpose of acquiring or merging with an existing company. And there is no deal more perfectly suited for Representations and Warranty (R&W) insurance than one involving a SPAC.

    Private Equity took years to embrace R&W coverage, which transfers the indemnity risk away from the Seller to a third party – the insurer. It’s just a matter of time before SPACs do the same.

    SPACs have been in the news lately.

    Oakland A’s executive vice president (and former general manager) Billy Beane of Moneyball fame partnered at the end of January with RedBird Capital Partners to form RedBall Acquisition, a SPAC set up to the acquire a pro sports team. Hedge fund leader Bill Ackman raised $4 billion for his SPAC, the largest listing to date. All told, SPAC listings have raised just about $40 billion so far in 2020, eclipsing the $13.2 billion raised in 2019, according to SPAC Research.

    PE firms and big-name investment banks like Goldman Sachs are getting in on the action.

    Partly driving this trend is the pandemic. The valuations of private companies are falling, and they’re looking for liquidity fast – which is something traditional IPOs definitely don’t offer, especially in this time of market volatility. SPAC IPOs aren’t as dependent on market performance to be successful. Finally, they also allow sponsors to acquire quality companies at lower valuations.

    All this means opportunity for savvy investors, who enjoy the many benefits a blank check company provides:

    1. It’s safe. Money raised for a SPAC during the IPO sits in a trust until there is an acquisition. You don’t lose money if the deal doesn’t go through.
    2. In two to three years, investors can potentially see a sizeable return. You could put the money with a PE Firm, but that capital is committed for seven to 10 years.
    3. They can walk away. Founders of SPACs must make an acquisition within two years. They must convince investors to back the deal. If an investor isn’t happy – they can take their money and walk.
    4. Less than 10% of SPACs fail to complete an acquisition.
    5. The value of the acquisition sometimes brings the stock price well above the usual starting price of $10/share. And sponsors and shareholders have a vested interest in increasing value.

    Sellers love SPACs because they regularly outbid other offers to get these acquisitions and they are under time pressure. SPACs consistently pay more than everybody else. PE firms can’t match these premiums because they want to get the best return on investment.

    Why R&W Insurance Is Perfect for SPACs

    SPAC founders are under tremendous time pressure to get deals done within the two-year deadline, which, except under very specific circumstances, is set in stone.

    They need deals to go smoothly and on schedule. Plus, the longer it takes SPACs to complete a business combination – the more leverage the target has to insist on narrow Reps and Warranties and other Seller-favorable terms.

    That’s where R&W insurance comes in. It hedges risk for both Buyer and Seller and is built to facilitate fast acquisitions. Here’s why:

    1. It transfers risk of breaches of the Seller reps and warranties to the insurance company.
    2. It provides a hedge to Buyers. The board of directors of the SPAC and shareholders are protected if a post-closing breach occurs. They won’t be subject to covering that loss.
    3. When this coverage is made part of the deal early on, there is no need for the sometimes contentious negotiations over reps and warranties because, if there is a breach, the insurer pays the damages.

      This speeds up the process – not to mention saves on legal fees, about 20% savings on the negotiations part of the deal. The management team of the acquisition target will likely work with the SPAC going forward, so if negotiations are amicable, it means a good working relationship going forward.

    4. The target company keeps more money in their pocket rather than in escrow. You can’t understand how big a deal the removal of escrow is. A typical SPAC purchase is $200M to $1B, which means typical escrows are from $20M on the low side to $100M. If you can relieve tens of millions of those dollars because R&W is in place, it’s a no-brainer.
    5. Sometimes due diligence by the SPAC team is not as thorough because they are trying to save time and money. R&W underwriters could point out things they could diligence a bit more. They could uncover soft spots in diligence that should be addressed.
    6. Provided this approach is used at the opening of negotiations, the target company will gladly pay for R&W coverage. The SPAC doesn’t incur any premium cost, which can run $500K to a couple of million. A target will gladly pay that to have $2M in escrow instead of $30M.
    7. R&W insurance is also another hedge for Directors and Officers Liability insurance. Say a SPAC has a two-year D&O policy with a six-year tail. If R&W coverage is in place, those D&O Underwriters are open to shrinking that tail premium because there is less exposure.
    8. R&W coverage is another way to persuade possibly uncomfortable shareholders. This is not usually an issue. But it’s one more argument in your favor to get it done.

    SPAC sponsors are incentivized to make deals work, because if they have to give money back to investors, they don’t get paid and could lose standing in the eyes of potential future investors in other SPACs.

    With SPACs there is no history of performance. Investors look at the sponsors’ reputation and expertise when they decide to buy shares, as do target companies when they decide to accept offers. A tarnished reputation makes it hard to move forward.

    If deals are eight times more likely to close with R&W coverage in the PE market, I would believe it’s at least that much in the SPAC market.

    Given all this, why aren’t SPACs running to R&W insurance right now?

    Until recently, most sponsors have been big-time banks and successful investors and executives. They have experience in M&A, of course, but as Strategics they held so much leverage over their targets, R&W wasn’t necessary. So they never really considered it – or even knew what it was.

    Today, large PE firms, who have embraced R&W insurance, are coming to the forefront as SPAC sponsors. R&W is definitely in their “toolbox”.

    It’s clear that Representations and Warranty insurance is ideal for SPACs. To find out how this specialized type of insurance can change the game for you, whether you’re a SPAC sponsor or a target company, contact me, Patrick Stroth, at for all the details.

  • Intellectual Property in M&A – and How Representations and Warranty Insurance Fits In
    POSTED 9.1.20 M&A

    Representations and Warranty (R&W) insurance is a specialized coverage that transfers all the indemnity risk to a third-party – the insurer. If there are any breaches of reps and warranties post-closing, the Buyer simply files a claim and gets paid damages.

    In many cases, it’s a much more affordable alternative to traditional indemnification – the holdback of funds in escrow to pay out any possible damages that come up from breaches. Because they take home more cash at closing, R&W insurance is especially appealing to Sellers.

    Due to the protection it provides, R&W coverage is becoming an increasingly common feature of transactions in just about every industry. And because it’s now available for deal sizes under $20M, it’s been embraced by Buyers and Sellers of lower and middle market companies, including PE firms and strategics.

    Despite its many advantages, R&W insurance went over like a lead balloon in Silicon Valley for many years.

    Why? Early R&W policies would exclude intellectual property. It was considered uninsurable. And because IP is such a central part of deals with tech companies, what would the point be of seeking a policy that didn’t protect for breaches in that area?

    These days, breaches of IP-related reps and warranties, in which the Seller states that there is no litigation or claims related to IP infringement, they are the sole and exclusive owner of the IP, and they have the right to transfer the IP, are insurable.

    This doesn’t have ramifications just for mergers and acquisitions among Silicon Valley tech companies.

    Today, every company is a technology company, not just those that have hardware and software as their central offering.

    Consider McDonald’s. In 2019, the fast-food giant made three key acquisitions of innovative tech companies: Dynamic Yield, which offers personalization and logic technology, Apprente, known for its voice-based conversational technology, and Plexure, which creates mobile apps.

    The goal was to incorporate tech from these companies to install more efficient and personalized ordering through mobile devices, self-order kiosks, and drive-thrus at McDonald’s locations.

    When companies like McDonald’s make acquisitions, they want to ensure the IP they’re buying is free of encumbrances that could cost them months or even years down the line, such as code that comes from another source.

    The Best Ways for Buyers to Get Ahold of IP They Need

    During my recent interview with veteran M&A lawyer Louis Lehot, formerly of DLA Piper and founder of his own boutique law firm, L2 Counsel, he highlighted three different ways a Buyer might get access to IP they need:

    • Mergers are the easiest way to sell a company because it does not require all shareholders to agree to sell all their shares. You simply need a majority of outstanding shares of capital stock to approve it. This type of deal also has tax advantages for the Seller.
    • For Buyers who simply want access to technology, they could simply license it. This way, the Buyer doesn’t have to worry at all about any breaches and liabilities. However, they aren’t the only company able to take advantage of this tech. There could be other license holders.
    • However, for Buyers who want to be able to “build on” IP, developing it to further monetize it, an asset acquisition is the way to go. They are able to only secure the part of the company they need and avoid any liabilities the entity might have. They can also “cherry pick” team members from the target business they want to bring on. This also gives them “exclusivity.”

    Typical Breaches of IP Reps

    We don’t know if R&W insurance was used in these acquisitions by McDonald’s. However, in deals like this, where the technology and the intellectual property is so important, it’s a good idea for Buyers because of the many risks that might prevent it from fully making use of the IP it has acquired:

    1. Open source code being used. “Open source code is code that’s already been developed,” explains Louis. “And the condition to using that open source is that if your code contains the open source code, then you have automatically granted a license to everyone in the community.”
    2. A failure to secure consent from third parties (such as former employees or founders) who have a claim to the IP for the deal.
    3. Claims from third parties that the IP infringes on their patents or IP rights. For example, former employees from another company are accused of using tech they brought over from their ex-employer.
    4. A failure to properly register the IP with the government.
    5. Lack of evidence that employees or contractors who helped create the IP gave away their rights to the Seller.
    6. The product or service uses or licenses technology from a third party, and the Seller does not have the right to transfer the IP without consent.
    7. If the tech involves sensitive customer data, and there is no privacy policy with customers that allows the company to transfer and disclose this data.

    A nightmare scenario: A Buyer acquires a cutting-edge startup with the technology it needs to keep up with their competition. However, post-closing it is discovered – when a lawsuit comes their way – that a bit of critical code backing up this IP was actually from another company. The programmer was simply trying to take a shortcut, and nobody noticed.

    1. One of Louis Lehot’s tools for avoiding situations like this is a questionnaire that covers IP issues. It includes questions like:
    2. How did the IP first come to the company? A red flag here, says Louis, is former employment of founders. If they worked previously at a company and then start a new company doing the same thing in the same way – that’s a huge problem.

    Did each founder assign his or her IP to the company? “I’m always shocked to find the number of defective assignments of IP at formation,” says Louis. “And so that’s an easy fix, as long as the founder that contributed that IP is still around. But if you have a co-founder that was really key to the development of the IP, that formation has departed, and you have no leverage to get that person to sign in as assignment later on, that can be sticky.”

    R&W Insurance Protects Buyers and Sellers in Case of IP Issues

    During the interview, Louis also explained that R&W insurance has revolutionized how deals are done in recent years. Not only does it provide protection but also helps create a less potentially contentious relationship between Buyers and Sellers down the road. As he put it:

    “I think it’s in the interest of Buyers and Sellers to externalize the risk of breaches of reps and warranties with insurance. And it really takes the sting out of the friction of an ongoing relationship between a Buyer and the Buyer’s new employees, who are helping the Buyer monetize the IP.”

    “Really, going back to those employees and dinging them for indemnification claims is really the last thing you want to be doing and the easiest way to disincentivize them and demotivate them from doing what they need to do.”

    The addition of IP protection to Representations and Warranty insurance, as well as its recent price drop and availability for deals involving lower and middle market companies, has made it a game-changer in the M&A world. As a broker, I’ve been fortunate to have had years of hands-on experience with R&W coverage. I’m ready to discuss how it might benefit your next deal. You can contact me, Patrick Stroth, at