Slow but Sure – W&II, the new risk hedging trend in M&A

by time news

2024-11-08 07:09:00

Legal affairs news channel

There has⁢ been much discussion about the role of ‍representations ⁢and⁢ warranties ​(“D&Gs”), their function ​in contracts for the sale of shares/assets and the liability ‌arising from their inaccuracy or falsity. Basically, D&Gs are‌ tools in M&A transactions ​used to manage and allocate⁢ risks. In this way, whoever makes a ⁤statement‍ assumes the ⁤risk‍ that the facts or state declared regarding a company ‍or the individual himself are not truthful.

As a rule, falsity or inaccuracy can lead ‌to breach of contract⁤ and​ damage to the buyer.⁤ The⁢ mechanism commonly adopted to ensure that the⁢ buyer is compensated for the losses caused involves the withholding of a part‍ of the price,⁤ by the buyer⁣ (holdback) or by ‍third parties ⁣(escrow). The first​ requires⁣ the buyer to retain part of the price for a certain period. The ⁤second,‍ the establishment of an escrow‍ account ‍where the buyer⁤ deposits a part of the price, which is held‌ by an ‍agent for a‌ period of time,⁣ the disbursement⁣ of ‌which involves the occurrence of certain events and the sending of‌ an ‌instruction.

However, the use of warranty and indemnity insurance (W&II) has increased as a coverage mechanism for parties. This⁢ mechanism is⁤ mainly offered with three types⁣ of products:

1. Warranty and indemnity insurance: aims to protect⁣ the parties from ‌a loss resulting ⁤from non-compliance or misrepresentation in the D&G. In this way the risk is transferred from the defaulting ‍party to a⁤ specialized third party, or ⁣insurer;

2. Insurance ​covering tax/tax risk: aims to reduce or eliminate exposure⁣ to⁣ a tax risk following a ‌complaint or audit by tax authorities, regarding the tax ⁢treatment‌ applied to a transaction. This insurance aims to ​transfer ‍tax risk from the taxpayer to⁤ the insurer; AND

3. Litigation and potential⁤ risk insurance: aims to‍ cover and​ compensate: (i) losses caused ‌by damages ⁣and losses faced by⁢ the defense of a⁢ company ⁢due ‍to an active lawsuit or possible litigation (adverse judgment‌ insurance), or ⁤(ii) a favorable outcome insurance in the ​first instance⁣ when an appeal is unfavorable to the initially successful party in a trial (preservation of the sentence).

This is​ how insurance companies (or underwriters)⁢ have sought to delve into ⁢the mergers and acquisitions‌ market by offering a service that adapts to the ‌needs⁤ and ⁣preferences ⁢of the parties.⁢ Although in ‌Colombia this mechanism was adopted in only 8% of‍ transactions, in Europe the trend rose to 16%, ‌a figure analyzed thanks to the annual⁢ studies developed by the CMS global network (CMS European M&A Study ⁤2024).

On the one hand, the proactivity of ‍insurance companies in making themselves known and making the parties ‌involved ‍in these operations ​aware of the advantages they can ⁢offer for the distribution of risks will be decisive. On the other hand, this alternative presents itself as an ⁣opportunity for parties ‍and ⁢their advisors to: encourage the ‌disclosure of⁤ transparent and sufficient information; structure more attractive ⁤contracts in competitive transactions; close​ transactions⁢ that in principle can be hindered by deal ⁢breakers and protect commercial and even personal relationships, post-closing.

#Slow #WII #risk #hedging #trend
Interview: The Role ⁤of ⁢Representations,⁣ Warranties, and Insurance in M&A Transactions

Time.news Editor: Good morning, and‌ welcome to ‌our segment on‍ legal affairs! Today, I have the pleasure of speaking with [Expert’s Name], an​ authority in corporate law and mergers and acquisitions. We’ll be diving into the nuances of representations​ and‍ warranties in M&A transactions. Thank you for joining us, [Expert’s Name].

Expert: Good morning! Thank you for having me. ‍It’s a pleasure to discuss these critical aspects ‍of M&A.

Editor: Let’s get⁤ right into it. Could you explain the concept of representations and warranties ⁢—⁢ often referred to as D&Gs — and their significance in M&A contracts? ‍

Expert: Absolutely!​ Representations ⁣and‌ warranties‌ are essential components of M&A ⁤agreements. They serve as assurances ‌from the ⁢seller ⁤to the ⁤buyer regarding certain facts about⁣ the business being sold. Basically, these statements relate to the condition of the company, its assets,‌ and any potential liabilities. If ⁤these assertions turn out to be false or misleading, they can lead to ⁤significant liabilities for‌ the seller,⁣ as they bear ​the risk of those inaccuracies.

Editor: So, if a representation or warranty is ⁣found⁣ to be incorrect, how do buyers typically protect themselves⁤ against potential ​losses?

Expert: Buyers usually include mechanisms‌ in the contract to safeguard their interests. One common approach is ⁤withholding a part of ⁤the ​purchase price, known as a holdback, for a certain duration. Alternatively, ​they⁣ may utilize an escrow ‍arrangement, where a portion of the funds is held by a third ⁤party. This ⁢retained‌ amount⁢ can then be used to compensate for ​any potential breaches or⁣ misrepresentations.

Editor: That sounds‍ like a prudent approach. ⁣However, I’ve heard​ there’s‌ been a ‍notable shift towards warranty‍ and indemnity‌ insurance (W&II) in recent years. What’s driving this​ trend?

Expert: Great observation! The​ uptick⁤ in W&II can largely be attributed ⁤to the increasing complexity of transactions and ⁤the associated risks. These insurance ​products ‌provide an additional ‌layer of ‌protection. For instance, if⁤ a seller fails ​to comply with their D&Gs, the insurance can cover the losses⁣ without draining the seller’s resources. This ⁢shift not only offers peace of mind for buyers but also allows⁣ sellers to negotiate better terms since​ their exposure to risk is mitigated.

Editor: You mentioned different types of W&II products. Could you briefly outline them?

Expert: Certainly! The main types include:

  1. Warranty and Indemnity⁤ Insurance: This protects against losses stemming ⁣from non-compliance or ​misrepresentations‍ in D&Gs, effectively transferring​ risk from the defaulting party to the insurer.
  1. Tax Risk Insurance: This is specifically designed to address ⁢concerns about potential tax liabilities ⁣following audits or⁢ disputes with tax authorities regarding the treatment of a transaction.

These⁢ products cater to various concerns that can​ arise in M&A, making ⁢them invaluable in modern deals.

Editor: It’s intriguing how⁣ these instruments create a safety⁢ net for both⁣ parties involved. Are there any potential downsides or challenges associated with using W&II?

Expert: Certainly, while ‍W&II‌ can‌ be beneficial, it’s important‌ to remember that there ⁢are costs involved in ⁢securing such insurance. Additionally, the underwriting process ‍can be thorough, leading‍ to possible delays in⁢ closing transactions. Moreover,⁢ obtaining​ comprehensive coverage may be challenging ⁣in highly complex or contentious deals.

Editor: As always, navigating these complexities requires expert insight. Before we wrap up,​ what ‌advice ‌would you give to companies considering M&A transactions regarding the use of​ D&Gs ⁢and‍ insurance?

Expert: ‌ My key advice would be to ‍conduct diligent due⁢ diligence and ​carefully ​assess the risks ‌involved. Collaborating ​closely with legal ⁢and insurance⁤ experts can greatly enhance the understanding of potential liabilities and help craft robust representations and warranties. ⁢This proactive approach ⁢can ⁤ultimately facilitate ‌smoother negotiations ‍and successful transactions.

Editor: Fantastic insights,⁢ [Expert’s Name]! Thank you for ⁢shedding ​light‍ on the intricacies of representations​ and​ warranties and the evolving ‍landscape of M&A.

Expert: Thank you for having me! It’s ⁤been a pleasure to discuss ‌these vital topics.

Editor: And thank you to our audience for tuning in! ‌Stay informed and connected with Time.news ‌for more updates on legal affairs and beyond.

You may also like

Leave a Comment