The critical give-and-take between buyers and sellers in both domestic and international transactions largely focuses on risk allocation and protections. For sophisticated serial acquirers, the negotiation of key provisions and remedies has been streamlined to both accelerate the time to close and avoid a contentious relationship with the target after the deal is closed.

In this detailed discussion, the participants debated various risk allocation approaches and looked at the increasing use of transaction insurance. In addition, the conversation explored the strength of various protections, forms of closing conditions, and other remedies.

Faculty member Laurance Shapiro, from the Mergers & Acquisition Group at Willis Towers Watson, asked the group to describe how they prepare for negotiations from a contractual perspective. The conversation spanned the various stages of negotiations from pre-negotiation NDAs to closing conditions and post-closing issues.  

The use of restrictive covenants, agreed by the parties prior to the purchase agreement, including the LOI and NDA, was the opening topic. Sergio Letelier, Deputy General Counsel of Corporate, Securities and M&A at Hewlett-Packard Enterprise, cautioned that NDAs contain “hooks” akin to “little time bombs" hidden in the provisions of the agreement. Letelier continued with advice for the audience to negotiate necessary provisions, but not to over-complicate negotiations at such an early stage of a deal.

Rounding out the NDA discussion, Adam Fliss, General Counsel at TPG Capital, advised the audience to “fashion the NDA to make sure the smallest population of information is covered under this NDA.” Fliss asked, “What is the universe that really needs to be subject to the NDSA?”, while also counseling the audience to refrain from muddling the overall deal negotiations during early negotiations.

Shapiro directed the conversation to address the many challenges faced by active acquirers in a seller’s market. Fliss responded “10 years into a bull market, gone are the days of indemnities and robust closing conditions,” adding that there is now added pressure on advisors, lawyers, and dealmakers to be more thoughtful and strategic during negotiations. Letelier added that deal teams should “have principles, have a North Star” to guide them efficiently during negotiations.  This is best when done in advance.

The panel also discussed the relative amount of protection offered by heavily-negotiated covenants in the purchase agreement. Pointing out that protection is a combination of deterrence and due diligence, Letelier noted that due diligence is a better way to protect a purchase because “an operational issue [in the target] doesn’t go away because you have financial protections.”

Additionally, the panelists asserted that deal certainty rests on the various contractual protections built into the agreement, ranging from regulatory approvals to financial commitments. Negotiating strong covenants, while also performing robust due diligence, is the principal method of ensuring deal certainty according to the dealmakers in this discussion.

Concluding the conversation, the discussion looked at representation and warranties insurance. An increasingly common deal tool, Shapiro noted that more than 2,500 transaction insurance policies have been taken out in the North American market. The participants agreed representations & warranties insurance generally motivates dealmakers to focus on the real issues of the negotiation.

Letelier commented on the increase in the use of insurance as “a reflection of the trend you see in the market generally,” where select terms of the deal and the protections secured by parties have increasingly become uniform across the M&A landscape.