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W&I insurance on Take Privates and Public M&A

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Mergers and Acquisitions

By Terence Montgomery and Alex Keville | May 7, 2020

In this article, we outline some of the key considerations for using W&I on public M&A deals.

Warranty and Indemnity (W&I) insurance has seen significant global growth over the past decade, predominately driven by increased use on bilateral deals and competitive auction processes in the private M&A space. However, it can be (and has been) used on Take Privates and public M&A structures. In this article, we outline some of the key considerations for using W&I on public M&A deals with a focus on Take Privates although the same principles apply to other public M&A structures.

W&I on a Take Private?

Used effectively, W&I insurance can act as a deal enabler on many Take Privates like it does on private M&A deals as it can be structured to provide a buyer with a more fulsome set of W&I (eg. operational, business, financial and tax, in addition to fundamentals) with recourse against a W&I insurer, providing greater comfort over unknown risks and increasing confidence on valuation and execution. The traditional public M&A challenge of getting a wide or divided shareholder base to agree meaningful W&I or provide effective recourse can be overcome. The W&I insurance outcome on a Take Private can be similar to that on a private M&A deal, but some of the key issues to consider include:

Structure and Key Persons

The deal structure and involvement of controlling shareholders, management and/or persons with requisite knowledge can impact W&I insurer appetite, coverage and pricing (in addition to geography, sector, size and financial condition). The W&I can often be structured with the warrantor(s) as shareholders, management and/or the target, and importantly, on a nil recourse basis. Otherwise, a proposed synthetic W&I structure (agreed direct between the buyer and insurer) would need very careful consideration as the outcome can vary.

Timing

The optimal risk transfer outcome is usually the issue of the W&I insurance at or as soon as possible after announcement/signing. As a Take Private involves a more prescribed timetable than for a private M&A deal, the W&I insurance timetable needs to be managed effectively to support the overall deal timetable. This will include consideration of the timing of information access, due diligence, negotiations, W&I insurer selection and underwriting review, alongside key deal milestones such as announcement, signing, approvals and completion.

Disclosure

Disclosure and availability of information needs to be considered at the outset. W&I insurers usually expect adequate disclosure and due diligence to enable a good W&I insurance outcome. Listing rules disclosures by the target, although helpful, are not typically granular enough (noting that the financial retention and de-minimis in the W&I insurance will be much lower for the benefit of the buyer), so access to additional information may be required. Commercially, it usually needs to be a friendly/non-hostile deal. From a legal and regulatory perspective, the target and principals often need to comply with additional obligations on confidentiality and takeover regulations. Therefore, it is important to consider what information will be available, and when. Insurers will execute confidentiality agreements and hold harmless letters.

Coverage and insurer appetite

The W&I underwriting process and coverage position for a take private is similar to a private M&A deal, but it’s important to note that insurers will have additional focus on, and may seek to exclude, listing rules compliance, public D&O risk and fraud absent effective subrogation rights. Otherwise, W&I insurers generally have a good appetite for a wide range of geographies and sectors at commercially competitive pricing, but they may be selective if the target is in major financial distress.

Moving forward

While it won’t be required on every public M&A deal and will fit the commercial dynamics and takeover regulations of certain exchanges better than others, those looking for public M&A opportunities should consider W&I insurance. The experience and sophistication that W&I insurers have gained, and the pricing and coverage secured, across hundreds of deals in the private M&A space can be leveraged to benefit the W&I insurance outcome on Take Privates and public M&A.

Author

Practice Leader - Mergers and Acquisitions, Asia Pacific

Alex Keville
UK Practice Leader M&A, FINEX

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