By Matthew Studley
M&A transactions are the perfect opportunity for a lawsuit: So when merging with another entity, acquiring a company or partnering with a vendor or supplier, you’ll want to close all the risks before cementing the relationship.
Otherwise, you risk ending up on the wrong side of a settlement you can’t pay.
Protecting yourself and your organization is critical during a merger. Whether you’re looking for an exit strategy or to buy a competitor, there are gaps to fill and risks to consider.
What’s more, you’ll need to consider and cover the risks post-transition. Here are some of the M&A insurance coverages involved and the risks they can help mitigate.
Representations & Warranties Insurance
With every M&A deal, the seller makes contractional guarantees known as representations and warranties that establish the conditions under which a deal can proceed. If there’s misrepresentation during negotiations, or within the share purchase agreement, Representations & Warranties (R&W) insurance covers unknown or unintended breaches of representations and warranties made during M&A negotiations.
Traditionally, business owners used escrow holdbacks to protect themselves against misrepresentations during negotiations. With R&W coverage, the seller can receive the entire amount of the deal up front, and the insurance protects the buyer’s money for everyone.
D&O Insurance
You may already have Directors & Officers (D&O) coverage, but you’ll need a new policy when the company transitions. In any merger and acquisition, D&O is one of the most important coverages to secure, especially at a critical juncture in your organization’s history.
If your business is transitioning to a public entity, examine the D&O contract carefully — private D&O usually includes a number of extra coverages that disappear with public D&O. However, it may be worth negotiating to include some of those extra coverages, especially those related to employee practices liability (EPLI) coverage.
While D&O insurance renews annually, you’ll want to end your current contract on the last date of your private or independent company and start a new contract on the first date of your public or merged company. Consider purchasing runoff coverage in which you make a one-time payment to buy future years to submit historical liability.
Contingent Risk Insurance
If you’re a buyer, contingent risk insurance protects you from currently pending litigation against the seller. Policies are tailor-made to identify and protect particular risks associated with known and ongoing suits of all types.
During negotiations, liabilities for pending litigation are often a major point of negotiations, as it can affect the indemnities or amount of escrow. Contingent risk insurance helps remove this point of contention.
Managing Historical Insurance Policies
If you’re the buyer, it’s worth considering whether you want control over that company’s old insurance policies. Although an administrative issue, control over the old policies ensures direct access to coverage in case of an issue. Because tracking down old insurance documents or former employees isn’t always possible, coordinate from the beginning to ensure you have control (or copies) of all the policies.
Contact your HUB broker to discuss what you need to know about risks and insurance gaps as you steer your business through a merger or acquisition.
