Page 21 - Representation & Warranties Insurance
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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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