A risk free M&A deal?

W&I policies were created for mega deals (international deals between companies and private equity investors), where sellers were unwilling to give commercial/tax warranties.

Over the last five years mid-market deals (deals up to £250m) have been able to secure W&I cover with specialist brokers calculating premiums based on financial risk and business sector. Premiums vary from 0.5% to 2% of cover.

Is W&I cover common in the mid-market?

It sounds like a great deal!  Selling shareholders can walk away from a sale knowing they have no real risk.  Commercial (business) warranties can last 18 months to three years, while tax warranties last seven years. Risk can be up to the total sale price.  Despite this, many private company sellers decide not to take out cover:

• Premiums are paid up front/committed, but sellers are not certain that any claims will arise.
• £10m of cover would have a premium varying from £50k to £200k (so, material).
• Disclosed risks will be excluded from warranty and indemnity cover so some risk remains with the sellers.
• Disclosure can cover the sellers’ risk removing the need for W&I.

Disclosure

The sellers’ lawyers will prepare a disclosure letter detailing facts which are inconsistent with warranties.  Clear and accurate disclosures will protect sellers from warranty claims.  Buyers can ask for further cover but, in most, this will remove the risk. Having seen this process unfold, many sellers decide that disclosure is more than sufficient.

How does cover work?

Brokers will give an outline premium based on the company/sector and deal value.  The broker’s lawyers monitor the deal and confirm the premium at completion.  Responsibility for the premium is agreed when the offer is made/heads of terms agreed.

When is warranty and indemnity insurance cover used?

• Some sellers may be prepared to pay a premium for the peace of mind, or because they are not able to manage claims.
• For multiple sellers a W&I policy can simplify arrangements.
• Insurance can help with fairness between sellers if some cannot assume risk (trusts, estates of deceased shareholders who need to distribute proceeds).
• Some buyers prefer their risk to be covered by a W&I policy rather than by shareholders. This may be the case where there is an earn out, or a PE investment with sellers running the business.

If you have any questions about the above or would like to discuss W&I cover to protect your M&A deal, please contact our expert Corporate team by email or call +44(0)3333 231580