Insuring the Deal: KeyConsiderations whenUtilizing TransactionalInsuranceMay 15, 2019

Overview Introduction to Representation and Warranty Insurance (“RWI”)Market DataMarket Developments“No Seller Indemnity” StructureClaim Process and ProceduresRWI for Public Deals and Other Insurance ProductsGibson Dunn2

Introduction to Representationand Warranty Insurance

Overview RWI provides coverage for financial losses resulting from breaches of representationsand warranties made by target companies or sellers contained in purchaseagreements Protects an insured from unanticipated (unknown) losses that may arise subsequentto the closing Preserves deal value by shifting risk of loss to insurer for fixed cost Generally covers all (or substantially all) representations in the purchase agreementas well as a pre-closing tax indemnity Certain representations and warranties are more closely scrutinized by insurersand may be addressed through increased due diligence or exclusions RWI can extend an indemnification package (e.g., excess coverage) or serve as thebuyer’s sole resource for recovery Buyer side and seller side policies are available, although buyer side policies are muchmore popularGibson Dunn4

What RWI Does and Does Not Do What RWI Does: Provides coverage for unknown breaches of reps and warranties in the purchaseagreement, often with meaningfully longer survival periods than a seller iscustomarily willing to provide Typically provides coverage for pre-closing standard tax audit risk What RWI Does Not Do: Provide a “plug-and-play” wholesale replacement for a traditional seller indemnity Provide coverage for seller’s covenant breaches However, it is possible to re-characterize certain covenants as representations andwarranties – for instance, the seller’s interim operating covenants can often be coveredthrough a closing bring-down of the seller’s absence of changes representation Provide coverage for known risks or for areas of risk that are particularly difficult todiligenceGibson Dunn5

Benefits of RWI for Buyers Risk Management Benefits: Increase maximum indemnity (clients can purchase as much insurance as they feelnecessary) and extend survival period of representations and warranties (policiesgenerally survive for longer periods than in the acquisition agreement) Eliminate seller post-closing credit/collection risk (e.g., multiple sellers, foreignsellers, insolvent sellers) Provide recourse when no seller indemnity is possible (e.g., public companysales, bankruptcy or distressed situation) Strategic Benefits: Distinguish bid in auction (i.e., be viewed as more attractive bidder) - reducescomplexities of negotiating indemnification provisions with sellers Protect key relationships (e.g., management) If RWI policy is the buyer’s sole recourse, the seller is generally willing to provide amore fulsome representation and warranty packageGibson Dunn6

Process and TimingGibson Dunn7

Policy Exclusions Certain matters are excluded from coverage in virtually every policy,including: Matters known to the deal team of the insured buyer Uninsurable fines and penalties Pension underfunding Asbestos/PCBs/CFCs/USTs Value of deferred tax assets Collectability of accounts receivable Payments pursuant to purchase price adjustments Forecasts and forward looking statementsGibson Dunn8

Policy Exclusions – Interim Breach Interim Breach In a transaction involving a staggered sign-and-close, most policies includean exclusion for losses arising from an “Interim Breach” which a breach inwhich: the facts and circumstances that caused the breach occurred betweensigning and closing (the “interim period”); and a member of the buyer’s deal team obtained actual knowledge of thebreach during the interim period For policy drafting purposes, try to limit interim breach to only includebreaches where all of the facts that caused the breach first occurred duringthe interim period In practice, interim breaches are rare, but consider the interplay betweenthe interim breach exclusion and the closing condition regarding theseller’s repsGibson Dunn9

Enhanced Diligence Areas Often, insurers will designate certain areas as “enhanced due diligence areas” While not a blanket exclusions, insurers are signaling to the buyer that they havecertain underwriting concerns regarding these areas and that they will focus on thebuyer’s diligence findings before determining whether to provide coverage Common “enhanced due diligence areas” include: Wage and hour matters Cyber security/privacy Products liability Professional services liability Condition of assets Unaudited financial statements Depending on the target’s risk profile in the foregoing areas, certain carriers mayinsist on a blanket exclusion for some of these categories regardless of the results ofthe buyer’s diligenceGibson Dunn10

Environmental Coverage Available RWI coverage for environmental reps varies based on the target’senvironmental risk profile, as well as each individual carrier’s appetite to insureenvironmental matters Environmental coverage options range from: No coverage (i.e., the carrier excludes environmental coverage entirely) Coverage on an “excess” basis, meaning that the insurer will provide coverage for abreach of the environmental reps, but only (i) to the extent the loss would becovered by an existing environmental policy and (ii) once the coverage under suchunderlying environmental policy has been exhausted Full coverage Where environmental coverage is available, it is almost always a heighted area ofdiligence RWI environmental insurance coverage is not the same as an environmental policy. Ifbuyers have environmental concerns regarding the target, they should stronglyconsider a stand-alone environmental policyGibson Dunn11

Market Data

Market Developments Transaction liability insurance carriers in 2014:Gibson Dunn13

Market Developments Transaction liability insurance carriers in 2019:Gibson Dunn14

Market DevelopmentsNumber of Deals Closed Total R&W, Tax, and OtherCorporate Transactions34%AonestimatesMore than75% of privateequity/financialsponsor deals utilizedR&W insurance700Number of Deals Closedof North Americandeals usedrepresentations &warrantiesNon-Corporate 8YearGibson Dunn15

Market Developments: More Innovative Insurance Solutions Broader Coverage Generally, no restrictions on industry sector Some industries such as healthcare used to be challenging to insure, but certain carriershave developed expertise in these areas and are now able to offer fulsome coverage Insuring title on upstream oil and gas transactions can be challenging, although recentinnovative products have been introduced to address this issue Streamlined Process Insurers / brokers are staffed by former M&A attorneys who work on deal timelines Fewer Exclusions Competitive market dynamics have forced insurers to narrow and eliminateexclusionsGibson Dunn16

Market Developments: More Innovative Insurance Solutions Increased Limits of Liability Individual insurers generally cap coverage between 25 million and 50 million However, limits in excess of 350 million are available by stacking policies, and coverage of upto 1.5 billion is achievable Flexibility to Insure Smaller Deals Some carriers are willing to insure transactions as small is 10 million, although the cost ofthese smaller policies on a percentage basis is higher Minimum coverage amounts are generally 3 million and carriers still charge anunderwriting cost of 30,000- 40,000 Reduced Premium Rates and Deductible Levels Total costs are typically 2.5%-3.5% of the policy limit (and even lower for larger deals) Currently standard retention amounts are 1.0% of enterprise value on transactions of up to 500 million, and .75% of enterprise value on transactions in excess of 500 million, generallystepping down to 0.50% over time (usually 12 months following closing)Gibson Dunn17

Market Developments: More Innovative Insurance Solutions Limited Coverage for Interim Breach A small number of carriers will provide coverage for interim breach on transactions with abrief period of time between singing and closing (generally no more than 45 days) at a cost of 25,000- 50,000 Other markets will allow for erosion of the retention up to a threshold (i.e., 25% of theretention amount) for non-covered loss, including interim breaches Coverage Enhancements for Fundamental Representations Some markets will provide lower (and sometimes nil) retentions for breaches of fundamentalreps Coverage for fundamental reps and taxes available on an excess basis at a significantlyreduced rate (0.75% of the coverage amount or less) Coverage for Non-Control Transactions Ability to insure transactions where the buyer is acquiring a non-controlling interest in thetarget (i.e., joint ventures, preferred equity investments)Gibson Dunn18

“No Seller Indemnity”Structure

“No Seller Indemnity” Structure It is increasingly common for the parties to agree to completely eliminate theseller’s liability for rep breaches (i.e., the seller’s representations andwarranties do not survive the closing). In those transactions, the seller doesnot indemnify the buyer for breaches of such representations following theclosing, and the buyer looks solely to an RWI policy to recover losses fromsuch breaches. Most insurers are now willing to offer the same coverage limit, initialretention, drop-down retention and scope of coverage in a deal without aseller indemnity as in a deal with a seller indemnity Most insurers will impose a modest premium increase (generally 15,000- 50,000)to reflect the perceived moral hazard of a no-seller indemnity transaction structureGibson Dunn20

“No Seller Indemnity” Structure: Trends Reflecting industry trends, Aon observed that the popularity of “no sellerindemnity” policies increased from 2016 to 2018:Gibson Dunn21

Development of “No Seller Indemnity” Structure When RWI first gained market acceptance, policy retention amounts were routinely1.5%-2.0% of the purchase price It became routine for the buyer and seller to “split” the retention amount, meaningthe buyer would be responsible for the first 0.75%-1.0% of losses (replicating acustomary “basket” amount in a seller indemnity deal), the seller would indemnifythe buyer for the next 0.75%-1.0% of losses, and the buyer would then look to theRWI policy for any further losses A prolonged sellers’ market initially incentivized buyers to propose no sellerindemnity deals in competitive processes to distinguish their bids, and no sellerindemnity structures are often proposed in competitive auctions as a matter ofcourse Additionally, as retention amounts have decreased to 0.75%-1.0% of enterprise value,the benefit to a buyer of “splitting” the retention has decreased Buyers often don’t see value in negotiating an indemnity section and forming anescrow for an indemnity of 0.375%-0.50% of purchase priceGibson Dunn22

“No Seller Indemnity” Structure: Buyer Benefits While the “no seller indemnity” structure has obvious benefits for the seller,there are also several benefits for the buyer: The use of a no seller indemnity structure may enhance the buyer’s coverageunder the policy: “Full Materiality Scrape” – most policies will “read out” materiality qualifiers in the representations andwarranties for purposes of determining whether a representation has been breached and the amount oflosses resulting from such breach. However, in deals with a seller indemnity, most policies will only readout materiality for purposes of the reps if the acquisition agreement includes a full materiality scrape “Damages Exclusions” – the policy will generally not independently impose broad damage exclusions,such as exclusions for consequential damages and damages based on multiples of earnings and lostprofits, unless those exclusions are included in the Loss definition in the underlying purchase agreement Accordingly, seeking a seller indemnity can jeopardize the buyer’s efforts to obtain coverageenhancements under the policy, since the seller may resist a materiality scrape or insist onexclusions for certain categories of damages in the purchase agreement with respect to itsindemnification obligationsGibson Dunn23

“No Seller Indemnity” Structure: Buyer Benefits (cont.) By eliminating the need to negotiate an indemnification section, the use of RWI canmeaningfully shorten negotiations with respect to the acquisition agreement,which can be an important factor in a competitive process The seller is generally willing to expand the substantive coverage of therepresentations in the acquisition agreement and to reduce the use of knowledgequalifiers, thereby improving the buyer’s basis for recovery under the policy Eliminating post-closing recourse for rep breaches helps preserve relationshipswith the seller after the closing, which is especially important if the seller is amember of the management team or is a party to a transition services agreement Less burdensome recovery – when a claim arises in a “no survival” deal, the buyercan work with a stable, creditworthy insurer to process the claim, rather thanhaving to fight the indemnity claims on two fronts in order to also obtain recoveryfrom the seller (who is only liable for a relatively smaller amount); no concernabout seller controlling third-party claims in which it has little at stakeGibson Dunn24

“No Seller Indemnity” Structure: Limitations Known contingent liabilities identified during the buyer’s diligence will not be coveredunder an RWI policy — if the buyer is not willing to bear the risk for those liabilities,the parties may still need to spend meaningful time negotiating special indemnitiesfor those matters The buyer remains exposed to extraordinary losses in excess of the coverage limitfrom breaches of fundamental representation In a transaction with a seller indemnity, the seller might agree to indemnify thebuyer for losses arising from fundamental representation breaches in excess of thepolicy coverage limit In a true “no survival” deal, however, the buyer may not be fully compensated forits losses in the event of a breach of the sellers’ fundamental representations The buyer’s diligence poses a “Catch-22” in a no seller indemnity transaction: thebuyer will want to conduct a comprehensive diligence process so that it is fully awareof all of the target’s risks, but doing so will deprive the buyer of coverage under thepolicy for any liabilities that it uncoversGibson Dunn25

“No Seller Indemnity” Structure: Limitations (cont.) Coverage for pre-closing taxes is generally more limited than a standard seller preclosing tax indemnity RWI policies will cover the tax representations in the acquisition agreement, as wellas a standalone pre-closing tax indemnity However, pre-closing tax coverage will be limited to coverage for taxes that thebuyer doesn’t know about when the policy is bound For example, accrued taxes for pre-closing periods that are not yet payablewould not be covered under the policy, even though such taxes typically wouldbe covered under the seller’s standalone pre-closing tax indemnity This leaves the parties with a few options Retain a stand-alone seller pre-closing tax indemnity to “backstop” the coverage under thepolicy Have seller agree to pay taxes on unfiled pre-closing tax returns as they come due Estimate accrued pre-closing taxes as part of the purchase price adjustment and reducethe purchase price accordinglyGibson Dunn26

Claims Process andProcedures

Claim Percentages Aon has been notified of 249 R&W claims on policies placed beginning in 2013Claim PercentagesRepresentation & WarrantiesPolicies23%19%19%20%18%Buy-side 229 Claims 14% policies6.00%2013Gibson Dunn2014201520162017Sell-side 20 Claims 42% policies201828

Trends in ClaimsTrends in Claims: Closing toClaim NoticeTypes of Breaches5354440 to 6months33%376 to 12months31%3635282524 months7%18 to 24 months13%12 to 18months16%Median: 15 MonthsMean: 10 MonthsRange: 3 days - 53 monthsInterim Claims: 10Financial ComplianceStatementsOthersTaxEmployee Contracts Intellectual LitigationPropertyExamples of “Other” Environmental: 8 Product Liability/Recall/Warranty: 10 Condition of Assets: 9 Healthcare: 4

Timeline of a Claim (Buyer-Side Policy)1.Policyholderdiscovers potentialbreach of a repSTEP 1STEP 23.Demand to Seller(if appropriate)STEP 32.Investigate todetermine if breachhas occurred**STEP 45.Informal call betweenpolicyholder andcarrier to discussnature of breach andloss and plan forclaim assessmentSTEP 54.Notice the CarrierSTEP 67.Policyholderresponds withinformationSTEP 76.Carrier determinesthe necessity ofoutside advisorsand issues formalrequest forinformationSTEP 88.Negotiation9.ResolutionSTEP 9

Takeaways: What are Insurers Evaluating?Proving theBreach Is there a breach of a specific representationunder the purchase agreement? Are there applicable exclusions? Did an identified party have actual consciousknowledge of the alleged breach?Loss Is the loss recurring or one-time? How should the loss be calculated? Multiple of EBITDA if that is how deal wasvalued? (Create a record of the multiple) Diminution of value? Dollar for dollar? How can the insured validate the amount of loss? Can the loss be mitigated or is there an offset ?Gibson Dunn31

RWI for Public Deals andOther Insurance Products

RWI for Public Deals Generally speaking, there is no seller indemnification in public transactions.However, buy-side RWI policies can provide the buyer with a source ofrecovery for breaches of the target’s reps in the merger agreement. Historically, use of RWI in public company deals has been limited for reasonsincluding Confidentiality concerns with soliciting quotes for RWI before a public dealis announced Challenges with including a “materiality scrape” in the policy where thetarget’s reps are heavily qualified by material adverse effect (and disclosureschedules are therefore sparsely populated when compared to privatedeals) Timing concerns in public company transactions that often move veryquicklyGibson Dunn33

RWI for Public Deals (cont’d) Carriers are willing to place RWI policies following the signing of the mergeragreement, alleviating timing on confidentiality issues that accompanybinding a RWI policy pre-signing Even with MAE qualified reps, insurers are willing to include a full materialityscrape, although it is often accompanied by a materiality threshold forpurposes of making a claim (much like a de minimis claim amount) The target’s reps will be qualified by public disclosure, and carriers willgenerally be unwilling to insure reps regarding the adequacy/accuracy of thetarget’s SEC disclosureGibson Dunn34

Tax Liability or Tax Opinion Insurance “Tax Liability” or “Tax Opinion” insurance protects buyers against a successfulchallenge by the IRS or other foreign, state or local tax authority Policy pays tax, interest, penalties, contest costs and gross upGibson Dunn35

Tax Liability or Tax Opinion Insurance (cont.) Tax insurance can be applied to the following: S corporations Reorganizations (tax-free and taxable) Section 355 spin-offs REITs/real estate acquisitions/sales NOL carryforwards Partnership issues Employee benefits issues Federal and state tax credits (renewable energy, LIHTC, historics) Cross border and international issues Tax risk management (no transaction needed) Tax shelters (listed transactions) are not insurableGibson Dunn36

Litigation InsurancePending or potential litigation can expose buyers to significant risksand financial liability. Litigation insurance can offset that risk or limitthe liability buyers will be responsible for once the deal is complete.Ongoing Business Risk ManagementM&A Deals Helps sellers avoid substantial escrowrequirementsAllows buyers to ring fence the cost ofdamages from an adverse judgement Protects companies from catastrophicloss from an adverse judgementWhen to consider Litigation InsurancePossibility of acatastrophic outcomeGibson DunnPending litigation ispreventing a deal fromclosingSignificant delta betweenlikely range of damagesand amount sought byplaintiffLitigation record is welldeveloped37

Litigation Insurance: Insuring Against the Risk ofNon-Reversal on AppealSolutionAon structured an appellate risk policy that capped the client’sexposure if the appellate court does not overturn the judgment, thusallowing client to recoup some of the cash collateral and to reopen itslines of credit so that it could make an acquisition.Client ChallengeBackground Client lost a 20M compensatory and punitive damagejudgment following entry of a default judgment against it and asubsequent trial rife with reversible errors. The judgment was impeding client’s PE owner from selling thecompany, and client’s cash position was compromised bothbecause it was forced to put up significant cash collateral tobond its appeal and because its lenders had severely restrictedits borrowing ability.Obstacle Although the Court had committed numerous reversibleerrors, the client allegedly had engaged in unsavory behavior inconnection with the litigation. Even when a case should be reversed, there is no certainty thatthe appellate court will do the right thing.Gibson DunnCoverageAmounts in excess of theretention for a final, nonappealable judgmentaffirming the trial courtjudgment.Limit & Premium 12.6M x/s 8Mretention.38

Litigation Insurance: Insuring Buyer Against an Early StagePatent Infringement LawsuitSolutionClient ChallengeBecause the case was at its inception, Aon worked with the client toprepare an analysis of the likely downside risk of royalty and lost profitdamages so that potential insurers would be able to propose aretention that would both protect the buyer from catastrophic loss andprotect the insurers from providing coverage within a likely range ofdamages.Background Buyer was negotiating the acquisition of a small competitor in anindustry roll-up transaction. Target had just been sued for patent infringement by the buyer’s chief competitor. Client believed that the lawsuit was a means to try to scare the target into sellingto the competitor rather than the buyer.CoverageIssued judgments-onlycoverage for a patentinfringement lawsuit.Obstacle Even though the buyer believed the litigation to be baseless and badly wanted toclose the transaction, it was unwilling to do so without an escrow indemnity fromthe target’s shareholders. Target’s shareholders, in turn, did not want to put up an indemnity because theytoo believed that the lawsuit was baseless, and the target was prepared to scuttlethe acquisition and defend the case. Litigation was in earliest stages, with only a complaint and no responsive pleadings.Gibson Dunn39

CFIUS Reverse Break Fee Insurance CFIUS is the Committee on Foreign Investment in the United States and ischarged with identifying and mitigating U.S. national security risks arising fromforeign investment in U.S. businesses CFIUS is comprised of 13 executive branch agencies, 9 of which have votingpower, and transactions are subject to review by CFIUS when they result inforeign “control” of a U.S. business (including U.S. operations of non-U.S.companies) CFIUS prefers and is entitled to review certain prospective acquisitions, and isauthorized to review transactions after they have closed under certaincircumstancesGibson Dunn40

CFIUS Reverse Break Fee Insurance (cont.) CFIUS Reverse Break Fee Insurance enables certain foreign buyers toparticipate in auctions and other sales of U.S. businesses that they might notconsider in the absence of insurance Often, Chinese and other foreign buyers are not willing to shoulder the risk ofpaying reverse break fees in the event of a failure to receive approvals from CFIUS,even when they are receiving solid advice that they should receive approval Insurance expands the universe of potential buyers of U.S. businesses thatsellers may access to include foreign buyers that would not agree to undertakethe payment of a reverse break fee triggered by their failure to obtain CFIUSapprovalGibson Dunn41

CFIUS Reverse Break Fee Insurance: Coverage CFIUS Reverse Break Fee Insurance covers a buyer when: (a) CFIUS intends toissue a report recommending that the President of the United States prohibitthe acquisition unless the buyer withdraws its application for CFIUS approval,(b) the President issues an order prohibiting the acquisition and (c) the“outside date” under the acquisition agreement is reached and CFIUS approvalhas not been obtained The covered loss under the policy is the amount of the CFIUS reverse breakfee, less any self-insured retention or deductible, plus other broken deal costs,such as attorneys’ fees, investment banking fees, financing costs and otherdiligence costsGibson Dunn42

Panelist Profiles

Matthew Dubeck333 South Grand Avenue, Los Angeles, CA 90071Tel: [email protected] B. Dubeck is a partner in the Los Angeles office of Gibson, Dunn & Crutcher, where he practices in the firm’s Mergersand Acquisitions, Private Equity and Securities Regulation and Corporate Governance Practice Groups. He advises companies,private equity firms and investment banks across a wide range of industries, focusing on public and private merger transactions,stock and asset sales and joint ventures and strategic partnerships. Mr. Dubeck also advises public companies with respect tocertain corporate governance matters.In 2017, Mr. Dubeck was recognized by Law360 as a Rising Star in the area of Private Equity. Prior to joining Gibson, Dunn &Crutcher, Mr. Dubeck was an associate with Hogan & Hartson in Washington, D.C. He was a judicial clerk for Judge Julia SmithGibbons of the United States Court of Appeals for the Sixth Circuit and a judicial intern for Judge Ellen Segal Huvelle of the UnitedStates District Court for the District of Columbia.Mr. Dubeck received his law degree, magna cum laude, from Georgetown University Law Center in 2005, where he was electedto the Order of the Coif and served as Managing Editor of the Tax Lawyer. He received a Bachelor of Science degree in ComputerScience, cum laude with distinction, from Yale University in 2001. Prior to attending law school, Mr. Dubeck was a ProgramManager with Microsoft Corporation, where he designed search engines and natural user interfaces.Gibson Dunn44

Jonathan Whalen2100 McKinney Avenue, Dallas, TX 75201Tel: [email protected] Whalen is a partner in the Dallas office of Gibson, Dunn & Crutcher LLP. He is a member of the firm’s Mergers andAcquisitions, Capital Markets, Energy and Infrastructure, and Securities Regulation and Corporate Governance practice groups.Mr. Whalen also serves on the Gibson Dunn Hiring Committee.Mr. Whalen’s practice focuses on a wide range of corporate and securities transactions, including mergers and acquisitions,private equity investments, and public and private capital markets transactions. In 2018, D CEO magazine and the Association ofCorporate Growth named Mr. Whalen a finalist for the 2018 Dallas Dealmaker of the Year.Mr. Whalen received his law degree summa cum laude in 2009 from the SMU Dedman School of Law, where he was a memberof the Order of the Coif and served as an Articles Editor on the SMU Law Review. He earned his Bachelor of Science degreesumma cum laude and his Masters of Business Administration degree from Louisiana Tech University.Mr. Whalen is a member of the Texas Bar and admitted to practice in the State of Texas.Gibson Dunn45

Matthew Wiener5555 San Felipe, Suite 1500, Houston, TX 77056Tel: [email protected] Wiener is the head of Aon’s Transaction Liability team for the Southwest region and the national leader for its energypractice. In this role, Mr. Wiener is responsible for the development and implementation of transactional-based risk solutions,including the deployment of insurance capital for M&A transactions through representations and warranties, litigation, tax andother contingent liabilities insurance. Mr. Wiener is based in Houston and is further supported by a New York-based team of 20professionals in North America and colleagues in London, Hong Kong, Sydney and Bermuda who focus exclusively ontransactional risk transfer.Prior to joining the Aon Team, Matthew was an attorney at Vinson & Elkins LLP, where he specialized in corporate finance andsecurities law matters, including mergers and acquisitions, private equity, public and private securities offerings, divestitures,and general corporate representation, with a significant focus in the energy sector.Matthew is a graduate of The University of Texas with a BBA in Finance and Georgetown University Law Center with a JurisDoctorate degree.Gibson Dunn46

May 15, 2019 · Coverage Enhancements for Fundamental Representations Some markets will provide lower (and sometimes nil) retentions for breaches of fundamental reps Coverage for fundamental reps and taxes available on an excess basis at a significantly reduced rate (0.75% of the coverage amount or less)