Page 23 - Representation & Warranties Insurance

Exclusions

• A “single” materiality scrape provides that the Working Capital Adjustments (Duplicate Recovery)
materiality scrape will apply only when determining Transaction agreements may contain exclusions that
the amount of damages or losses, meaning that would prevent a buyer from recovering amounts from the
the materiality qualifiers would not be scraped in seller more than once (also known as double recovery).
determining whether a breach of a representation or For example, with this exclusion in place, a buyer would
warranty has occurred, such that an immaterial breach be unable to recover an amount under the working
would not trigger a breach of representations and capital adjustment process and also through a claim of
warranties under operative transaction agreements. For breach of the financial statement representation if the
example, a single materiality scrape provision could be adjustment and the claim were related to the same item
drafted as follows: or amount.

For purposes of calculating the amount of any Other Issues Identified in Due Diligence
losses that are incurred in connection with a breach Transaction agreements may contain an exclusion
of a representation and warranty in this transaction relating to the buyer’s opportunity to conduct due
agreement, such representation and warranty will be diligence with respect to the company prior to the
read without regard and without giving effect to the transaction closing. These exclusions may stipulate
term “material” or “material adverse effect” (fully as that the seller will not have any liability to the buyer
if any such word or phrase were deleted from such with respect to a breach of representation, warranty
representation and warranty). or covenant under the transaction agreement to the

• A “double” materiality scrape provides that the extent that the buyer knew of such breach as of the
materiality scrape applies to determining both whether closing date.
a breach has occurred and the amount of indemnified
losses resulting from the breach. For example, a
materiality scrape provision could be drafted as follows:

For purposes of determining whether there has been
a breach and the amount of any losses that are the
subject matter of a claim for indemnification, each
representation and warranty in this transaction
agreement will be read without regard and without
giving effect to the term “material” or “material
adverse effect” (fully as if any such word or phrase
were deleted from such representation and warranty).

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