NEW ZEALAND Law and Practice Contributed by: Ben Paterson, Cath Shirley-Brown and David Hoare, Russell McVeagh
6.8 Allocation of Risk A private equity seller in New Zealand will normally seek to minimise or exclude altogether any post-com - pletion liability for breaches of W&Is. Accordingly, W&I insurance is now a common feature in any proposed transaction by a private equity seller. Private equity buyers are also generally happy to accept W&I insur - ance, subject to there being some “skin in the game” on the part of the seller (eg, backstop coverage for any gaps in W&I coverage). Trade sellers may be inclined to bear more risk than their private equity counterparts, and are often more able to do so. That said, W&I insurance is being utilised by different types of sellers (including smaller-sized corporates and family-owned businesses) where there is a desire to ring-fence risk and obtain a clean exit. Unlike some other jurisdictions, generally, members of management teams in New Zealand will not provide any warranties to the buyer in their personal capacity (unless they are also sellers, in which case they tend to provide the same warranties as the private equity seller, albeit on a limited-recourse basis given the use of W&I). Any matters that are known to the buyer (customar - ily including those that are deemed to be known via the due diligence disclosure process) will be excluded from warranty protection; to the extent that the buyer seeks protection in respect of disclosed matters, it will need to seek specific indemnification for the matter or make an adjustment to its price. See 6.9 Warranty and Indemnity Protection and 6.10 Other Protections in Acquisition Documentation for further details of the allocation of risk between sellers and buyers in New Zealand. 6.9 Warranty and Indemnity Protection Private equity sellers in New Zealand will generally only directly stand behind fundamental warranties as to title and capacity. These will usually be capped based on the value of the underlying business and will be subject to a time limitation (usually two to three years).
To the extent that the buyer requires further protection in the form of business warranties, as previously noted in 6.8 Allocation of Risk , this will usually be provided by the seller on the basis that the buyer’s recourse is solely against the W&I insurance (and not against the seller, in the absence of fraud). The relevant policy will usually cover business warranties and an indemnity for pre-completion tax. The policy will typically be valid for two to three years for business warranties and six to seven years for the tax indemnity. The W&I insurer will not generally be liable for warranty claims unless the amount recoverable meets a speci - fied threshold. The generally accepted market position (for both insured and non-insured deals) is that an individual claim must exceed 0.1% of the purchase price, and the aggregate amount recoverable must exceed 1% of the purchase price (although insur - ers are offering de minimis and basket thresholds of 0.05% and 0.5%, respectively, or “tipping” or “partial tipping” arrangements in certain circumstances with a corresponding increase in the premium). Claims will also be subject to an overall cap (these can vary in size, depending on the overall deal size, but are typi - cally in the range of 20–40% of the total consideration for the target business). The W&I policy will contain limitations; as previously noted in 6.8 Allocation of Risk , it will not cover mat - ters known (or deemed to be known) to the buyer, or matters that arise (and which the buyer becomes aware of) in the period between signing and closing, and certain of the covered warranties will be subject to knowledge qualifiers. As per other jurisdictions, it is possible to obtain “add-ons” to a W&I policy to address these points (for example, “new breach” cover and “knowledge scrape” provisions) – however, this will generally result in a significant increase in the premium payable. There are also a number of common exclusions in W&I policies in New Zealand (price adjustment, environ - mental contamination issues, etc). To the extent that specific issues are identified as being a part of due diligence (by way of example, a
456 CHAMBERS.COM
Powered by FlippingBook