Years ago, tax deeds were, then as now, a standard part of any share acquisition, indemnifying buyers against post completion tax liabilities (incidentally no one ever understood why this custom had gained traction, but that’s another story). The average deed was a couple of sides of A4, run up by the transactional lawyer as part of the share acquisition documents.
The specialist calls
And then, around 1989, something happened in the City of London. Tax deeds got longer and longer until they averaged about 11 pages of A4 and they weren’t drafted by corporate lawyers any more, but by specialist tax lawyers. The tax specialist had arrived.
Something similar happened not long afterwards to service contracts –and eventually to insurance transactions. For a long time life assurance transactions in England were highly specialised affairs with only a small corps of lawyers undertaking them, but in the City of the 1990’s general transactional insurance also became increasingly the preserve of lawyers who specialise in the field. Transactional Insurance has arrived. It must have done, because Chambers UK guide, no less, recognises it as a specialism all of its own.
Transactional (or corporate) insurance is the name bestowed on a whole range of corporate transactions involving insurance companies, from their incorporation to their authorisation to corporate governance, through joint ventures, mergers and acquisitions down to their eventual run off or liquidation.
Why this trend? Insurance is one of those fields, like taxation or employment law, where the statutory ground rules of operation have become steadily more demanding over time. In the 1990s insurance and reinsurance companies steadily gained ground as providers of capital and alleviators of risk in the international financial system- but not everyone noticed as the headlines were grabbed by masters of the universe in their Wall Street investment banks. But come the apocalypse in 2008, suddenly it was not operators like Lehman Brothers who were necessarily seen as too big to fail, but companies like AIG who everyone suddenly discovered had been quietly providing the capital underpinning for a whole generation of growth. The same went for the famous name reinsurers.
It is no coincidence that this was the time that industry clients increasingly favoured transactional lawyers who specialised in the industry and understood the way it was regulated and the parameters that regulation imposed on what was and was not commercially possible. With millions of pounds riding on the way in which things like indemnities for miss-selling or orphan surpluses were dealt with in sale and purchase deals, clients turned to lawyers who’s dealt with these issues before and even discussed them with the regulators. They had already done that several years before in the claims arena.
In the region…
Since I arrived in the region in 2008, I’ve seen a similar pattern repeated in this region and worldwide. One might have expected the credit crunch to have killed MENA insurance transactional activity stone dead, bit it didn’t. Many of the big established names of the EU and US began to look beyond their boundaries as business woke up to the huge opportunities opening up in the developing world where there was less saturation and the chance of growth. At the same time regulation in the host states began to grow more complex with the influence of patterns of regulation in the EU, US and Australasia making itself felt in places like the Dubai DIFC, the QFC and in Bahrain.
This tended to presented many global insurers with a quandary: they wanted specialist legal advice of the kind they were able to get in New York or the City of London, while favouring law firms with global reach who wouldn’t have to spend an age becoming reacquainted with the client and local insurance every time a new cross border transaction presented itself.
Are they busy…?
So is there enough work to keep insurance transactional lawyers busy in this region? After all, the widely anticipated flood of insurance mergers and acquisitions activity which many have forecast will follow on from the regulatory shake up that is gathering pace across the region has not materialised yet. The answer is yes- in the past few years insurance M&A activity in the UAE has been inhibited by the long lasting moratorium on new start ups, but there has been a steady stream of transactions which have created work for insurance transactional lawyers. There have been cross border acquisitions by companies such as Zurich and RSA, and companies are increasingly looking at complex joint venture structures between foreign companies and local ones that are deeper and more integrated than the traditional reinsurance approach. The interest in establishment in the DIFC for EU and US insurers and reinsurers shows no sign of abatement, and there continues to be considerable interest in establishing takaful and retakaful entities with a cross border remit. Although the market is seen as exceptionally competitive it is also seen as one that few global players can ignore. Just to take one example, the concept of pension protection by way of insurance products is in its infancy here and surely has a future as an alternative to the gratuity system.
Relations with regulators
Insurance specialist lawyers on the whole enjoy a good relationship with regulators, onshore and offshore. Fundamentally they are on the same side – regulators welcome new entrants to the market and those that want to expand their business. Where there are issues, lawyers with regulatory experience will be quick to spot them in advance and advise their clients on how to structure a transaction to comply with the rules and still meet their commercial objectives.
What happens if…
Although you may hire the best transactional insurance lawyer in town, things can still go amiss. In this region, the practice of due diligence and discovery is not always widely understood. Whether due diligence is conducted by the buyer, or a ‘vendor due diligence’ report is provided, many sellers still have difficulty in understanding that disclosure actually protects their position on an orthodox sale, and staff can be reluctant to disclose problems under the apprehension that their position will be adversely affected. Clyde & Co’s recent study of deals across the region in the last couple of years revealed that in 38% of cases specific indemnities were provided. Which means a lot of deals without indemnities? Where there are no indemnities, the suggestion could be that due diligence has uncovered no problems requiring specific dollar for dollar protection free of argument about quantification of loss. Problem free companies or inadequate due diligence?
In terms of insurance or reinsurance companies the warranties that count are those on accounts, reserving policy ( I take it as given that the accuracy of reserves will not be on offer), reinsurance receivables, claims and litigation and accuracy of information on the system (what about those thousands of policies hidden in a cupboard somewhere?) No point in fighting to the last ditch for a stock warranty that is actually irrelevant to an insurance business – and does the buyer have adequate safeguards that it can actually obtain monetary compensation quickly and efficiently if there is a claim? Foreign law and jurisdiction may avail it little if the seller has no presence or few realisable assets in that jurisdiction. What about security? And if there is security, how easy will it be to realise under local law? The time to think about all these things is up front when the price is being fixed. To that extent, at least, the advice of the transactional insurance lawyer should be on all fours with that of his non insurance colleagues.