Kramer Levin recently completed its internal study of acquisition agreements for private target M&A transactions, and compared this data with the 2015 American Bar Association ("ABA") Private Targets Mergers & Acquisitions Deal Points Study and Kramer Levin's 2013 internal deal points study of private target acquisition agreements.
The results of these studies reveal a strong and continued shift toward seller-friendly terms in middle market M&A transactions. The shift is driven by robust competition in auctions, a continuing increase in sophistication and market awareness, and explosive growth in the use of representations and warranties ("R&W") insurance policies.
The most significant shifts in deal terms relate to the survival period for representations and warranties, and the related indemnity cap. The incidence of acquisition agreements in which the representations and warranties do not survive closing has grown dramatically. Such transactions accounted for only 1% of deals examined in Kramer Levin's 2013 study, but grew to 6% in the 2015 ABA study and 13% in Kramer Levin's current study. Notably, 65% of the transactions included in Kramer Levin's current study included the use of an R&W policy. Additionally, a majority of deals contain an indemnity cap of 10% or less of the total transaction value, with a significant number of deals trending toward a cap of between 5% and 7.5%, and the average is substantially lower when R&W policies are used.
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