Indemnities

Following on from recent posts, this week's post is again extracted (with thanks) from the Chairman's Red Book.

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An indemnity is an undertaking to meet a specific potential liability, or to hold someone 'harmless', on the happening of a particular event, similar to the obligations of an insurer on the happening of an insurable event.  Indemnities provide a clear allocation of risk in respect of an event.

The scope of the indemnity provided under an agreement should be carefully considered by the indemnifying party and the trigger for the indemnity clearly understood.  Depending on the wording of the indemnity, the amount that is claimable under an indemnity may not be limited by the usual common law requirement of remoteness, or any requirement of the indemnified party to mitigate loss. 

Similarly, the indemnity may be open ended and not subject to any limitation or exclusion under the agreement, and in some cases the event need not have been caused by any wrong of the indemnifying party.

Next week’s post will look at some of the issues to consider in relation to indemnities.

You might also be interested in The Chairman’s Red Blog, which is a supporting resource for the book.

Until next week.

What is a warranty?

Following on from recent posts, this week's post is again extracted (with thanks) from the Chairman's Red Book.

A warranty is essentially a guarantee that a factual statement is correct.  Parties will often negotiate to allocate liability for loss between them if the statement turns out to be incorrect.

In a merger and acquisition context, warranties are generally required where a party (often the buyer) makes an assumption when entering into an agreement, and wants to be able to sue the seller if that assumption is incorrect. 

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For example, where a buyer has determined the purchase price of the target company or business on the basis of its reported earnings, the buyer will usually require the relevant financial statements to be warranted by the seller so that the seller bears the risk of the financial statements being inaccurate.

Warranties are usually 'given' within the sale agreement by the warranting party at the time of entering into the agreement, and repeated at completion.  It is also common to see a statement to the effect that the warranties are taken as being repeated each day during the period between signing and completion.

‘Standard’ warranty limitations include -

1.  Seller's knowledge

2.  Disclosure

3.  Exclude future performance

4.  Buyer's knowledge

5.  Recovery from 3rd parties

6.   Specific (ie provided in the accounts; buyers action post completion; law changes; matter of public record)

7.  Insurance

You might also be interested in The Chairman’s Red Blog, which is a supporting resource for the book.

Until next week.

Gap between indemnity and insurance policy

Following on from recent posts, this week's post is again extracted (with thanks) from the Chairman's Red Book.

Given the specific wording of insurance policies and the fact that the deeds of access and indemnity often use general wording, it is clear that there are some forms of liability against which a company will be required to indemnify its directors under the deed of access, insurance and indemnity where the company will not be covered by insurance.

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One example is when a director seeks legal advice in anticipation of a claim, which may or may not be made against the director in the future.  The D&O policy will only respond to cover legal costs once the claim is made.  A gap may also occur because the insurance policy provides cover for a maximum sum whereas the indemnity offered by the company is unlimited.

You might also be interested in The Chairman’s Red Blog, which is a supporting resource for the book.

Until next week.

D&O exclusions

As mentioned in the last post, a D&O policy is normally something that a company should obtain and maintain for each of its directors. 

It is important to note however that D&O policies usually exclude cover for acts or omissions of directors, before the policy period commenced, that the director reasonably knew were likely to give rise to a claim and which were not notified to the insurer. 

Fraud or dishonesty, or any wilful or deliberate breach of the law by the insured, will also be excluded.

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Numerous other standard exclusions are normally set out under a D&O policy.

Although these exclusions are typically 'standard', each company's D&O policy is a bespoke contract and should be checked carefully to understand the coverage limitations.

Until next week.

Deeds of access, insurance and indemnity

Following on from last weeks' post, this week's post is again extracted (with thanks) from the Chairman's Red Book.

Under deeds of access, insurance and indemnity, the company usually agrees to:

1.    indemnify the director to the extent permitted by law;

2.    maintain, and pay the premium on a D&O policy covering the director;

3.    maintain a copy of all board papers; and

4.    give the director access to the board papers and other documents of the company.

Access to board papers and company documents is essential for a director to discharge their obligations.

Most companies and directors put in place such agreements on a uniform basis for each director. 

Where deeds are required for other executives (non directors) they may require some modification.  For example, these officers will typically not be entitled to access the board papers.

You might also be interested in The Chairman’s Red Blog, which is a supporting resource for the book.

Until next week.

What is a ratchet & the Chairman’s Red Book

The Chairman's Red Book provides a quick reference guide for directors of any company, particularly chairmen of public companies (whether listed or unlisted).

At this stage, the book is only available on request, for anyone interested in receiving a copy, please let me know.  The Chairman’s Red Blog is also another supporting resource for the book.

Over the coming weeks, with special thanks to Brett Heading, and the other editors of the publication, there will be posts from the book on some of the core principles featured.

This week's post is shorter than the others (given the background outlined above) and simply answers the question - what is a ratchet.

A ratchet is a mechanism that varies the equity share that management receives on exit, depending on the achievement of certain objectives.

Typically, ratchets are based either on the multiple of money invested that is received on exit after repayment of debt, or the internal rate of return achieved by the private equity fund.

Ratchets can strengthen the alignment of the interests of management and the investor. However, the taxation implications can be complicated and need careful consideration in structuring any agreement.

Until next week.

What are the broad alternatives for professionals not wanting to use service trusts?

As set out in earlier posts, and with thanks to the Television Education Network, today’s post addresses the issue of ‘What are the broad alternatives for professionals not wanting to use service trusts?’. If you would like a link to the video please let me know.

As usual, a transcript of the presentation for those that cannot (or choose not) to view the presentation is below –

There's the ability to completely restructure the existing arrangements and move into a new structure and if that alternative was to be taken, there are then a series of different arrangements that might be entered into, and that can include a new structure in total, or some sort of hybrid arrangement. 

The types of structures that are available are only really limited by your imagination in terms of what may or may not be useful. 

Obviously, there are also a number of commercial issues that need to be taken into account.  Many of those will be driven by the actual underlying nature of the partnership that’s involved, but generally there are two alternatives if you're moving out of an individual structure, and that can be to incorporate or to form some sort of trust arrangement. 

Within those two parameters or those two goalposts, there's quite a large playing field in terms of what that might look like.  So in some instances, there's a hybrid between both companies and trusts.  In other instances, there are trusts which are of a hybrid nature.  So in other words, a unit trust or some sort of partnership of trusts or a blended discretionary trust.  Again the common theme is that it’s largely driven by what's going to be most useful for the underlying partners involved.

Until next week.