At a time when economic uncertainty is a reality of business in Ireland, sellers and buyers are seeking more creative ways to limit M&A transaction risk.
A key focus of negotiations in M&A transactions is how to allocate risk between the buyer and seller through warranty and indemnity coverage. Sellers seek to limit the scope of such protections while buyers look for sufficient cover for key historic risks to close the deal and protect them afterwards. This gap between the parties is closed by negotiation and in some cases by putting consideration retention or similar arrangements in place.
In the current economic climate, buyers face an increased risk that sellers may become insolvent after the sale. As a result buyers are showing renewed interest in Warranty & Indemnity Insurance - a bespoke policy for the benefit of either the seller or buyer which provides protection in the event of a claim arising from breaches of the parties’ negotiated warranties and indemnities.
While the underwriters of W&I insurance can insist on the parties retaining some level of risk, with premiums of 1 – 1.5% of the purchase price now being charged, W&I insurance is now being seen as an attractive option to enable an otherwise difficult deal to happen. Insurers understand that deals are time sensitive and as a result W&I insurance can be put in place in as little as one week. With more insurers continuing to enter the market, the availability and affordability of W&I insurance is increasing, making it a valuable option to facilitate a deal.
In the case of specific liabilities such as potential litigation, insurance can be arranged to ring-fence liabilities or provide catastrophe cover. Cover is also available for tax treatments which have a risk of being challenged by the tax authorities. While these types of cover are more expensive, in the right circumstances W&I insurance can make a valuable contribution by removing obstacles to completion of transactions.
Every deal is unique. However, the availability of bespoke insurance policies should be an integral consideration in the current economic environment where parties to a deal wish to protect their positions to the greatest extent possible.