Frequency/market practice: A cap can range from 1%-100% of the purchase price. The average cap amount has declined over the years due to the increased use of representations and warranties insurance (RWI). This is because caps are generally higher in deals without RWI than in deals that include RWI.
Frequency/market practice: Caps commonly apply to indemnification obligations in the whole agreement (although breach of seller's/target's covenants are often carved out of the cap). Other limitations on liabilities (e.g., baskets) commonly apply only to the non-fundamental representations and warranties. Specific representations and warranties (particularly fundamental representations and warranties) or other items in the agreement (such as special indemnities) may have different cap amounts.
Frequency/market practice: Fraud is usually excluded from the cap. Certain fundamental representations and warranties (e.g., authority, capitalization, no conflicts, and due organization) are also commonly excluded. Tax and specific areas of concern are often excluded, or may have specific higher caps. Breaches of seller's/target's covenants and the brokers'/finders' fee representation are also often carved out of the cap.
Frequency/market practice: Very common. Baskets in the US can be structured either as deductibles or tipping (also known as “first dollar”) baskets. In a deal with a deductible, the indemnifying party is only liable for losses over a stated amount. If the parties agree to a tipping/first dollar basket, the indemnifying party is liable for the total amount of losses once they exceed a specified threshold.
Frequency/market practice: Rarely. Though the same are more common in non-RWI transactions with a double materiality scrape (as the de minimis serves as a pre-agreed dollar threshold for materiality).
Frequency/market practice: Seller liability most commonly survives for twelve to twenty-four months for general representations, longer for fundamental and tax matters (typically, three to seven years), and indefinitely (or longer statutory periods) for fraud.
Frequency/market practice: It is common to carve out fraud from the limitations on seller liability. In addition, tax, employee benefits and environmental matters are commonly subject to survival periods that are longer than other non-fundamental representations and warranties (for example, until the expiration of the applicable statute of limitations or some period longer than the 12-24 month period described above). Additionally, such matters are also commonly subject to differing limitations on seller liability from non-fundamental representations and warranties. Fundamental representations and warranties, including authority, no conflict, capitalization, due organization, and brokers'/finders' fees are almost always subject to extended survival periods and carved-out from ordinary course limitations that are typical of non-fundamental representations and warranties.
Frequency/market practice: Fairly common. While RWI was previously used primarily in the private equity space, it has been widely adopted among strategic buyers as well and is typically included in more than half of all private M&A transactions. As demand for RWI and the number of insurers has increased over the years, insurers have been more willing to offer RWI for alternative deal structures, such as carve-outs and public-to-private transactions, for example. Almost all RWI policies are buy-side policies.