Mergers and acquisitions insurance, R&W Insurance
Morning in Venice - Corot |
Insurance to cover the risks resulting from
sale and purchase of companies, known as M&A insurance or W&I
Insurance, are not usual in practice, but there is a tendency that shows a
significant increase during the next years.
M&A insurances covers, in particular, the
representations and warranties (known as R&W) and sometimes the
indemnifications too. R&W consists of statements referring to the company
in respect of which they are issued. About this concept it can be visited
previous entries of this blog, such as: “Manifestaciones
y garantías en las compraventas de empresa, instroducción” o “Tipos
de manifestaciones y garantías en las compraventas de empresa”.
The scope of the M&A insurance can vary
greatly from one insurance to another, depending on each case, but its scope in
general is the fulfillment of the R&W stated by the seller, with the limit
of the price paid by the purchaser or the enterprise value of the target
company. However, it is also common that, in case of willful intent by the
seller, neither the limitation on the R&W nor the M&A insurance
applies.
M&A insurances require high premiums, so for
those who are not used to this type of insurance it can require higher expenses
than the expected. However, considering the amount of insured risks and the
probability of its materialization, at least part of the risks covered, its
cost is not as high as it might initially seem. However, the insurance cost can
vary greatly depending on the R&W drafted. In this sense, it should be
considered that the insurer determines the price based on the total amount
guaranteed, after analyzing the transaction, the documents formalizing such
transaction and, most notably, the R&W of the sale and purchase agreement
(SPA).
The use of M&A insurances is especially useful
for providing security and, in case of entities executing M&A transactions
regularly (such as venture capital and private equity entities), as an
instrument to avoid post-closing conflicts and trials with the purchaser. Apparently,
this trend in favor of M&A insurances arises both from the development in
M&A and, in particular, from the increase in global uncertainty. Another
variable affecting this kind of insurances may be the increase in the amount of
capital and information available, together with low interest rates.
The costs of an M&A insurance can be borne
by both the seller and the purchaser, or both parties. Furthermore, the policy
holder can be the seller or the purchaser regardless of who pays the insurance
premium.
Sometimes the use of an M&A insurance can make
the difference between closing the transaction or not, so the price of these
instruments may be worth it precisely because it is the instrument that finally
allows a successful deal.
Despite the aforementioned benefits, both in
aspects such as obtaining security, and facilitating the conclusion of the agreement,
the relevant costs and excess of M&A insurances, make necessary to analyze
in detail its pertinence, as well as what risks are covered and how the R&W
are drafted.
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