Mergers & Acquisitions
What is Mergers & Acquisitions Insurance?
M&A Insurance - or Transactional Risk Insurance - is a set of protections designed to help both buyers and sellers mitigate risk and facilitate the closing of a deal. For instance, buyers and sellers are often concerned about how contractual guarantees, taxes, or ongoing litigation might impact a merger or acquisition.
INSKING can tailor an M&A Insurance solution to address these types of concerns and provide the peace of mind to expedite negotiations.
Representations & Warranties Insurance
In every transaction, the seller makes contractual guarantees (known as Representations & Warranties) that establish the mutually agreeable conditions under which a sale can be made. Representations & Warranties Insurance policies facilitate transactions by bridging negotiating gaps on indemnification for breaches of these guarantees.
Representations & Warranties Insurance is a win-win solution for buyers and sellers. It is an added layer of protection for buyers to ensure the veracity of the seller's guarantees - and can also make the seller feel more comfortable in providing more extensive guarantees. This can reduce or even eliminate the amount of escrow required, which would free the seller from a heavily negotiated aspect of a deal and allow a buyer to make a more attractive and differentiated bid in a competitive process.
Litigation Buyout Insurance
Litigation Buyout Insurance - also known as contingent risk insurance - is another risk mitigation tool for buyers, protecting them against currently pending litigation that the seller is facing. Policies can be tailored specifically to the needs of a buyer, and can "ring-fence" particular risks associated with known and ongoing suits of all types, including class action, non-class action, and anti-trust suits.
During M&A negotiations, liabilities for pending litigation are often heavily negotiated - and often impact the indemnities or amount of escrow required. Litigation Buyout Insurance can help remove this potential point of contention, thereby helping both sellers and buyers come to an agreement sooner.
Tax Indemnification Insurance
Tax Indemnity Insurance policies provide recourse for a buyer at risk of an inadvertent error in the tax treatment of a historical, pending, or future transaction. These policies can even protect against future adverse rulings by federal tax regulatory bodies.
During M&A negotiations, tax liabilities are often heavily negotiated - and often impact the indemnities or amount of escrow required. Tax Indemnity Insurance can help remove this potential point of contention, thereby helping both sellers and buyers come to an agreement sooner.
3 common claims that can derail your next M&A
Explore the Value of Representations and Warranties M&A Insurance
As M&As increase both domestically and abroad, so have claims surrounding a seller’s representation of their business. Understand three common claims in M&A –tax issues and labor, employee misclassification, and international acquisitions – and how you can prevent them ahead of your next deal.
An uneventful merger or acquisition is hard to come by.
M&A claims – and their costs – are on the rise. In 2018, almost 26 percent of deals ended in a claim. And, the severity of claims greater than $10M has doubled, with an average cost of $19M.
Today, businesses considering a merger or acquisition must understand that the largest and most frequent claims often come from three areas: labor issues like employee misclassification, tax issues like S-corp status, and international deals in which U.S. businesses acquire like organizations abroad.
*Tax matters in M&A deals
One of the most common tax breaches in recent transactions includes corporate income tax, sales and use tax, and the validity of the target company’s S-corp status.
To avoid falling prey to any one of these claims, hire a third-party CPA firm or tax advisor to assess your target company’s tax profile. Do a historical analysis that goes back years highlighting these three areas of common tax breaches.
Underwriters are very knowledgeable of relevant tax issues. Make sure you choose a tax advisor that can properly communicate a message to the underwriter that the exposure is minimal or non-existent if that happens to be the case. Ask them to do a state-by-state-level analysis that examines local tax law as well to see if there’s a premise for taxation and what those penalties and fees are. When the exposure approaches a material portion deductible, that’s when the carrier knows they’re potentially on the hook for liability.
*Labor and Employment in M&A deals
Across industries from trucking to franchises, service-oriented firms, and customer service businesses, employee misclassification is a hot claims issue. And it’s about to escalate. With the passage of AB 5, a California law limiting the classification of workers as independent contractors rather than employees, employee contract status is getting a lot more attention as states like Illinois and New York are considering similar legislation as well.
When exempt and non-exempt employees are not classified correctly, there’s a great potential for claims litigation, both individual and class action suits to be brought against a company. These claims have significant long-term ramifications that can lead to hefty fines and back-pay and benefits to workers.
Due diligence on a company’s worker classification history is imperative. Find out if the target has had previous claims. Engage a labor and employment attorney during discovery to do so.
Underwriters are savvier on issues of employee misclassification than ever before and therefore, they are more likely to ask granular questions about the target business. Make sure your counsel is prepared to answer them.
*International M&A deals
A crowded and expensive U.S. M&A market has led domestic businesses and private equity firms to look beyond the border for both logical add-on acquisitions and new platform investments. One of the most important things businesses exploring this route need to know: Don’t try to take your U.S-centric playbook and apply it internationally. Instead, each foreign market will have its own rules, regulations, processes, and risks.
While this is similarly unchartered territory for underwriters, many of them have also been burned on foreign market deals. As a result, they’re getting smarter on international market issues and will only consider applications in which the buyer has done thorough due diligence – and can prove it. Underwriters are looking for third-party documents that specify due diligence, including reports on the target company’s legal, tax, financial, environmental, operations, and insurance/benefits standings.
Finally, seek out an attorney that specializes in international M&A and can provide local representation abroad. This will be important to the underwriter, as they’ll need to rely on your designated local representatives and advisor who understands local risks and can boil down the issues into U.S. lingo. An investment banker with significant cross-border expertise is also highly desirable.
It's never been more important to explore the potential value of Representations & Warranties (R&W) Insurance and its sister products including but limited to Tax Indemnity and Litigation Containment policies. R&W coverage protects both the buyer and seller from financial loss resulting in the seller’s representations. Contact your INSKING expert for more information on Representations & Warranties Insurance and M&A due diligence.