Page 21 - Representation & Warranties Insurance
P. 21

Description of Typical Representations and Warranties
















          Business Practice/Ordinary Course                      Solvency
          Most transaction agreements also contain a number      Typically, solvency provisions represent and warrant that
          of covenants obligating the parties to act in a specified   the target entity
          manner. A covenant is a formal agreement or promise to
          do or not do certain acts. Covenants are forward-looking   •  will be solvent (in that both the fair value of its assets
          and relate to the conduct of a party either between     will not be less than the sum of its debts and that the
          signing of the acquisition and closing of the transaction   present fair salable value of its assets will not be less
          or after closing. Pre-closing covenants may require the   than the amount required to pay its probable liability
          target entity to operate the business in the ordinary   on its recourse debts as they mature or become due);
          course of the business and that no extraordinary       •  will have adequate capital and liquidity with which to
          actions be taken, without the consent of the buyer      engage in its business; and
          that could have a negative effect on the target entity.
          For example, a transaction agreement may include       •  will not have incurred and does not plan to incur debts
          covenants precluding the seller from declaring dividends   beyond its ability to pay as they mature or become due.
          or distributions, incurring any indebtedness above an
          agreed-upon level, or acquiring or disposing of material
          assets, without prior approval by the buyer. Although, not
          technically representations or warranties, covenants may
          or may not be excluded from RWI policies.






































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