M&A Transactional Insurance

Exits

Merger and acquisition transactions are a core exit strategy in times of a lackluster IPO market. However, the complexities of representations and warranties made in deal documents can impose significant consequences on the level of indemnification offered by a seller as well as existence of escrows which can, in turn, lead to inability to close a transaction.

Deal Facilitation

Not surprisingly, the historical driver for Representations and Warranties (R&W) coverage was deal facilitation rather than risk transfer. The policy provides protection for unintentional breaches of representations and warranties in the sales agreement, transferring risk to an insurance policy rather than recovering damages directly from former shareholders. The majority of policies are purchased by the buyer, giving the buyer the advantage of offering more attractive terms by lowering escrow requirements and liability caps.

Where Things Can Go Wrong

Some examples of issues that trigger a “breach” in the merger or acquisition agreement are:

  • Inaccuracies in the financial statements
  • Understatements of accounts receivable
  • Legal compliance
  • Prior litigation

Easier Access

Historically, R&W coverage has been painstakingly difficult to secure and many times cost prohibitive. It was also geared to very large transactions that didn’t serve the smaller private sector well.

Recently, insurers have made the coverage far more accessible to even smaller transactions and the coverage has evolved into a risk mitigation tool that now comes at a reasonable cost for very specific, tailored coverage for unintentional breaches made in the final purchase agreement.

Mason has assisted clients gain a solid understanding of their options surrounding R&W coverage. Our relationship with all R&W insurers has given our clients R&W options allowing them to negotiate best possible terms for specific exits.