Once viewed as a novelty, mergers and acquisitions (“M&A”) insurance, also commonly referred to as representations and warranties insurance, is increasingly becoming a valuable and popular tool that can help deals and transactions progress more smoothly.
M&A insurance offers both buyers and sellers a solution which is designed to cover breaches in representations and warranties that are provided by sellers in the process of the transaction. This form of insurance has the potential to significantly reduce both parties’ inherent risk in completing a transaction, as well as help minimise the time needed to reach an agreement and close the deal.
When initiating a transaction the parties will often believe that their particular deal may be a ‘perfect fit’, the reality however can be that any transaction of significant scale will always contain unknown elements and unforeseeable risks. Despite conducting the best due diligence processes, the unknowns remain until the dust settles long after the deal is closed. Such incidents can arise when the post-acquisition revenue falls short of projections or the buyer incurs successor liability exposures such as unpaid income taxes or undetected environmental contamination. This is where M&A insurance can step in and be a powerful tool which assists deal makers enter the turbulent waters of mergers and acquisitions by providing them with the confidence of knowing that they have some protection against a wide range of losses which may result from such unknown risks.
M&A insurance can also provide protection and coverage for areas such as intellectual property, data, assets, accounts, contracts, and property. M&A insurance can furthermore be structured to protect buyers and sellers in claims arising from specific inaccuracies in representations and warranties made by the seller in an M&A transaction. Such inaccuracies can potentially create costly liabilities, leaving buyers with little or no recourse, and which may force sellers to hand back a portion of the purchase price.
A further example of where M&A insurance can come into play is in a purchase and sale agreement, wherein the seller is mostly likely going to make representations about the business. Such representations can include disclosures of all known liabilities, that the business is in compliance with all the necessary tax regulations, and that it is not violating any environmental laws. The buyer, in turn, may ask to be indemnified for any unintentional breaches of such representations. Such a request by the buyer can be satisfied through the purchase of transactional risk insurance.
The potential advantages associated with M&A insurance can therefore be summarised as follows; it removes the worry of not being able to collect on a seller’s promised indemnification, it can speed up a business sale by covering the liabilities of future representations and warranties claims, it can allow a seller to fully and completely leave a business and any responsibilities, if so desired, and it can allow the buyer to maintain a good relationship with the seller, who may become the buyer’s employee or business partner after the transaction.
M&A insurance therefore has the potential to mitigate any potential risks stemming from deal activity. M&A insurance can also provide coverage for losses or liabilities stemming from criminal or fraudulent activity discovered after a deal closes. As deal-making continues to increase, M&A insurance can provide sophisticated buyers and sellers with a comprehensive tool that reduces risk and assists them in reaching their transaction goals faster and with fewer headaches.