Healthcare M&A Deal Facilitation and Protection - Polsinelli
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Healthcare M&A Deal Facilitation and Protection
Healthcare
elists M&A
Deal Facilitation and Protection
Mat Allen Linda Jones Jon Henderson
Marsh USA Marsh USA Polsinelli, PC
Transactional Risk Healthcare Chair, Corporate and Transactional Practice Group
Co-Lead, Healthcare M+A Practice
MARSH
Agenda
• Strategic Healthcare Deal Facilitation and Protection
• Transactional Risk Insurance Overview
– Representations & Warranties Insurance
– Tax Indemnity Insurance
– Contingent Liability Insurance
• Claims Data and Protection
• Key Strategies for Deal Acceleration
• Healthcare Specific Applications
MARSH 2
Strategic HEALTHCARE
Deal Facilitation and Protection
3
Polsinelli’s Healthcare M&A Practice
2020-Q1 2021
96
Health Care Deals
24
Health Care Deals
50%
Buy-Side Representation
in 2020 Totaling in Q1 2021 Totaling
$3.4B $2.8B 50%
Sell-Side Representation
Buy-Side
Most Active Sectors Number of Deals
Sell-Side
Most Active Sectors Number of Deals
Hospitals and Health Systems 7 Hospitals and Health Systems 10
Optometry 7 Dental 7
Physician Groups 6
Skilled Nursing, Assisted Living and
Behavioral and Mental Health 5
Senior Care 2
Infusion Therapy 5
Medical Equipment and Supplies 4 Clinics and Outpatient Centers 2
Home Health and Hospice 4 Behavioral and Mental Health 2
MARSH 4Deal Facilitation & Protection
• Traditional Strategies
• Historical Hurdles for the Healthcare Industry
– Medicare
– Medicaid
• Where Transactional Risk Works Well
• New Healthcare Adopters
MARSH 5TRANSACTIONAL RISK INSURANCE
OVERVIEW
6Transactional Risk Insurance Overview
Created to facilitate M&A transactions by addressing indemnification issues
that arise during the negotiation of the transaction or during due diligence
that may prevent the deal from signing:
• Representations and warranties insurance
• Tax indemnity insurance
• Contingent liability insurance
Transactional risk insurance is used to protect or mitigate two types of risks
that typically arise from M&A transactions:
Representations and warranties insurance
Unknown and
- Buyer-side policy
unforeseen loss
- Seller-side policy
Identified tax issues
Identified and
known risks Other contingent risks (e.g., successor
liability)
MARSH 7Transactional Risk Insurance Overview
Significant growth in North America during past decade
2020 - $19.59 billion in limits / 584 closed deals North America Market Statistics for Marsh only
700 $25,000
2019 - $19.55 billion in limits / 526 closed deals
2018 - $13.75 billion in limits / 405 closed deals 600
2017 - $8.83 billion in limits / 303 closed deals $20,000
500
2016 - $6.03 billion in limits / 212 closed deals
2015 - $4.26 billion in limits / 159 closed deals $15,000
400
2014 - $2.73 billion in limits / 130 closed deals Limits Placed
($ in millions)
2013 - $1.34 billion in limits / 66 closed deals 300 Deal Volume
$10,000
2012 - $1.43 billion in limits / 51 closed deals
200
2011 - $767 million in limits / 45 closed deals
$5,000
2010 - $387 million in limits / 25 closed deals 100
0 $-
MARSH 8Transactional Risk – 2020 Deals by Industry Sector
• Health Care – 17 deals through 1stQ 2021, 36 deals in 2020
Deal Count By Industry
0 20 40 60 80 100 120 140 160 180
Communications, Media, and Technology 159
Manufacturing and Automotive 86
Retail, Wholesale, Food, and Beverage 48
Financial Institutions 37
Health Care 36
Professional Services 33
Life Sciences 29
Energy, Power, and Utilities 28
Other Services 24
Chemical 19
Construction 17
Transportation and Rail 13
Education 9
Agriculture, Forestry, and Fisheries 9
Sports, Events, and Entertainment 6
Aviation and Aerospace 5
Real Estate 5
Marine 4
Misc. Other 17
MARSH 9Transactional Risk Insurance Overview
The transactional risk insurance market has continued to evolve in recent years and
can provide more innovative insurance solutions than ever
The market now offers: Global Market Statistics for 2019 (Marsh only)
• Broader coverage
US$ AMERICAS EMEA ASIA PACIFIC TOTAL
• Streamlined process Limits of
• Increased limits of liability insurance placed 19,555,000,000 25,375,000,000 5,955,000,000 50,885,000,000
($)
• Reduced premium rates No. of closed
526 592 123 1,241
transactions
and deductible levels
Private equity
policies (as % of 51% 54% 42% 51%
Marsh has an estimated policies placed)
Corporate policies
25% global market share (as % of policies 49% 46% 58% 49%
placed)
Seller-side R&W
Marsh placed over 1,700 policies (as % of
1% 3% 6% 2%
R&W policies
Transactional Risk policies placed)
Buyer-side R&W
globally in 2019 policies (as % of
99% 97% 94% 98%
R&W policies
placed)
MARSH 10REPRESENTATIONS & WARRANTIES INSURANCE MARSH 11
Reps & Warranties Insurance Overview
Provides coverage for financial losses resulting from breaches of representations
and warranties made by target company or sellers contained in purchase
agreement
• Protects an insured from unanticipated (unknown) losses that may arise subsequent to the closing
• Reps & warranties insurance generally covers all reps & warranties in the purchase agreement
• Either buyer or seller can be the insured under the policy
Reps & Warranties Insurance: Typical Uses
Buyers Sellers
• Increase maximum indemnity / • Reduce contingent liabilities enabling distribution
extend survival period for breaches of sale proceeds
of reps & warranties • Include R&W insurance as the sole
• Provide recourse when no seller remedy in draft agreements in auctions
indemnity possible • Attract best offers by maximizing indemnification
• Distinguish bid in auction • Protect passive sellers
• Protect key relationships
• Elimination of seller post-closing credit risk
MARSH 12Reps & Warranties Insurance: Policy Considerations
Policies generally survive for longer periods than in the
Duration of Policy underlying acquisition agreement (3 years for general reps /
6 years for tax and fundamental reps)
Total costs are typically 4% +/- of the policy limit (one-time
Cost and Coverage Limits payment; % may be lower for larger deals), including
premium, taxes, underwriting fees and broker compensation
Retentions on R&W policies are typically 1% of enterprise
Retention / Deductible value (lower for large deals) and normally drop down to 0.5%
of enterprise value at 12-month anniversary of Closing
Carriers are typically willing to be silent with respect to
Definition of Loss consequential and multiplied damages (as opposed to having
exclusions for those types of damages)
Carriers are typically willing to recognize materiality scrapes
Materiality Scrape for purposes of determining the existence of a breach of a
rep and losses related thereto
Policies contain “Actual Knowledge” exclusion and exclusions
Exclusions for forward looking statements, working capital adjustments,
asbestos and PCBs, and pension underfunding/withdrawal,
NOL’s/deferred tax assets and transfer pricing
MARSH 13Reps & Warranties Insurance: Policy Considerations
Generally limited to actual conscious awareness (no constructive or
Definition of Knowledge imputed knowledge), with no duty to inquire and the carrier having
the burden of proving knowledge
Carriers will waive their subrogation rights against the sellers except
Seller Subrogation in instances of fraud
Carriers may agree to limit their subrogation rights against customers
Other Subrogation and suppliers (e.g., no subrogation against customers or suppliers
until losses against such parties exceed a specified threshold amount)
For small settlements by the insured and/or settlements by the
Settlements insured within the retention, carriers may agree to waive their
consent rights
Policies may contain a safe harbor provision, only permitting the
Failure to Comply carrier to deny coverage to the extent that the carrier is
actually/materially prejudiced by an insured’s failure to comply
Carriers are typically willing to bind coverage at signing subject to an
Signing vs. Closing exclusion from coverage of interim breaches
MARSH 14Reps & Warranties Insurance: Heightened Risk Areas Certain reps & warranties are more difficult to insure and may be addressed through increased due diligence, additional premium, or exclusions • COVID-19 • Cyber security/data privacy • Products Liability • Environmental • Wage and hour laws • Healthcare (Medicare and Medicaid billing) – Requires a 3rd party audit of ~ 100 claims MARSH 15
Reps & Warranties Insurance: Underwriting Process
Days 1 – 2
Engage broker (earlier in the process is better)
Note: Insurers need to understand exclusivity
Broker and potential underwriters execute NDAs arrangements on transaction (or lack thereof) –
timing / financial impact on process
Days 3 – 6
Obtain quotes from underwriters
• In order to get quotes, we need recent draft acquisition agreement, information memorandum and target’s financials
• No cost to obtain quotes
Day 6
Select underwriter
• Broker to discuss pros and cons of proposals
• Insurer diligence fee becomes payable upon entering underwriting ($25K – $40K)
1 2 3 4 5 6 7 8 9 10 11 12+
Days 6 to 12+
Underwriting of policy
• Underwriter to gain access to data room and legal, financial, tax and other diligence
reports (subject to non-reliance letters)
• Conference call with deal team and advisors
Policy negotiations
• Done in parallel with underwriting; outside counsel typically involved
MARSH 16Myth vs Reality
• R&W Insurance will slow the process - 4 days to obtain a quote and 5-7
days to finalize the insurance by signing.
• Too expensive – Cost can be paid for by seller or split by buyer and seller.
• Exclusions – only based on know items that should be included as
exceptions/scheduled to reps or based on lack of diligence. – Ability to remedy.
Auction vs. Exclusive.
• Deal Size – Can do deals as small as $25mm in EV.
• Every deal needs insurance – Not necessarily for exclusive deals with
financially strong indemnity. ~ 80% of PE transactions and ~ 65% PE to
Strategic.
MARSH 17Reps & Warranties Insurance: State of the Market
Increased popularity and well-developed market
• 2,000+ deals completed annually in North America (split between corporate and PE buyers)
• Insurers / brokers staffed by former attorneys – work on deal timeframes
• International capabilities
Target transactions and market trends
• Transactions between $25M – $5B+
• Limits available - $1B+ per transaction
• Generally no restrictions on industry sector
• Current market trends
Insurer commitment
MARSH
18TAX INSURANCE MARSH 19
Tax Insurance: Overview
Coverage
Insures against the financial consequences of an intended tax treatment being disallowed by relevant tax authority in
situations where:
• There is no clear precedence or guidance
• Transaction economics flowing to parties relies heavily on the tax structure such that investors and/or lenders thereto require comfort
that the tax structure and benefits will be respected
• Tax authority approval (e.g., PLR) is not available or cannot be received in required time frame
• Potential downside is significant relative to transaction size and the financial model does not allow for “margin for error”
Tax Liability Insurance Tax Indemnity Insurance
• Tax Opinion Insurance: Insure the conclusion of a tax • Typically occurs in M&A context
opinion or filing position for a specific transaction or • Known tax risks and certain tax attributes are excluded
event from traditional R&W policy
• Tax Return Insurance: Insure some or all positions on a • Backstops/replaces tax indemnity in SPA
tax return of a specific taxable period
• A separate tax insurance policy provides a holistic
insurance solution
Common Issues
• 355 spin-offs • Tax free reorganizations • Liquidating trust status
• 338(h)(10) elections/S-Corp issues • NOL protection • Capital gain v. ordinary income treatment
• Debt/equity characterization • Tax credits • REIT status
• Cancellation of indebtedness • Successor liability 20
MARSHCONTINGENT LIABILITY INSURANCE MARSH 21
Contingent Liability Insurance
Contingent liability insurance covers “one-off” identified potential exposures that
have not yet crystallized
Recent examples
• Successor liability
• Specific indemnities
• Fraudulent conveyance
• Other legal, legislative or regulatory risks
Three things necessary to insure a risk:
• Quantifiable risk
• Probability analysis
• No moral hazard
Cost, limits and deductibles vary based on the particular risk
MARSH 22Claims Data and Protection MARSH April 20, 2021 23
Frequently Made Claims
Representations relating to financial statements, compliance with laws, material
contracts and taxes are the most frequently alleged to have been breached
Source: 2020 AIG Claims Study
MARSH 24Timing of Claims
More than half of all claim notices are received within the first 12 months of
the policy’s issuance
Source: 2020 AIG Claims Study
MARSH 25Healthcare M&A
2021 and Beyond
Key Strategies for Deal Acceleration
MARSH April 20, 2021 262021 & Beyond
• Where We’re Headed
• How We Think About the Indemnification Package
MARSH 27Healthcare Specific Applications MARSH April 20, 2021 28
Deal Facilitation & Protection
• Current State
• Potential Future State
• Key Considerations
MARSH 29This document and any recommendations, analysis, or advice provided by Marsh (collectively, the “Marsh Analysis”) are intended solely for the entity identified as the recipient herein (“you”). This document contains proprietary, confidential information of Marsh and may not be shared with any third party, including other insurance producers, without Marsh’s prior written consent. Any statements concerning actuarial, tax, accounting, or legal matters are based solely on our experience as insurance brokers and risk consultants and are not to be relied upon as actuarial, accounting, tax, or legal advice, for which you should consult your own professional advisors. Any modeling, analytics, or projections are subject to inherent uncertainty, and the Marsh Analysis could be materially affected if any underlying assumptions, conditions, information, or factors are inaccurate or incomplete or should change. The information contained herein is based on sources we believe reliable, but we make no representation or warranty as to its accuracy. Except as may be set forth in an agreement between you and Marsh, Marsh shall have no obligation to update the Marsh Analysis and shall have no liability to you or any other party with regard to the Marsh Analysis or to any services provided by a third party to you or Marsh. Marsh makes no representation or warranty concerning the application of policy wordings or the financial condition or solvency of insurers or reinsurers. Marsh makes no assurances regarding the availability, cost, or terms of insurance coverage. MA13-12658 Copyright © 2019 Marsh Inc. All rights reserved MARSH 30
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