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There are good reasons to consider Mergers and Acquisitions Insurance from AIG

What are ‘Mergers and Acquisitions’?

Mergers and acquisitions (M&A) are both aspects of corporate strategy dealing with the buying, selling and combining of separate companies with the intention of generating growth within an existing market or expansion into a new market without having to create and develop a new entity from the ground up or enter into a joint venture.

Seeking the best result for both buyer and seller

An M&A deal is considered successful when both parties emerge from the negotiations having created value of their shareholders, whilst being aware of the potential risks and realisable benefits. In order to achieve such a result, the parties will have to identify which aspects of the business are important to them from an operational and valuation perspective. Once identified, these will form the backbone of the agreement between the parties.

What are the potential benefits?

The reasons behind M&A activity vary widely. Common rationales include: seeking economies of scale and distribution; enhancing value through combining businesses; increasing market share through the acquisition of competitors; and rationalising corporate and tax structures.

How can insurance assist?

M&A insurance is a highly specialised field of cover that facilitates the smooth running of the M&A process. It does so by transferring certain potential risks of the transaction (whether already foreseen or which may surface at a later date) to an insurance policy. M&A insurance can also enable sellers to realise the benefits of the transaction sooner by avoiding the need for a retention or escrow account. This is particularly useful for managed funds who need to return funds to their investors, but has the potential for a significant time-value gain for any seller.

Who is it for?

Any company considering a merger, acquisition or restructure may wish to consider specialist M&A insurance.

What is covered?

AIG offers a range of bespoke M&A insurance products, specifically designed to solve commercial risks arising from M&A transactions. AIG’s highly specialised M&A insurance products are underwritten by an international team of skilled insurance and M&A professionals who integrate closely with negotiating parties and their advisers to create tailored solutions that can facilitate commercial objectives whilst minimising deal risk.

Some examples include:


Warranty & Indemnity (W&I) insurance is a tailored product from AIG Europe’s M&A team which covers either the buyer or the seller for loss arising from breach of the warranties and indemnities given in an acquisition agreement (SPA).

Sellers can obtain a clean exit by using W&I insurance to ensure that the sale proceeds can be returned to investors and avoid the need of an escrow account.

Buyers can procure warranty protection on transactions where the seller is reluctant to give warranties or where there is doubt over the seller’s ability to satisfy a claim.

Market

Any company considering a merger or acquisition.

Features & Benefits

W&I Insurance enables a buyer to:

  • Supplement their protection for breach of warranty both in terms of quantum and certainty of payment.
  • Extend the duration of warranties, giving them additional time to detect and report warranty breaches.
  • Distinguish their bid in a competitive auction by negotiating more limited recourse against the seller by supplementing the contractual recourse with W&I insurance.
  • Protect their relationship with the sellers who may become their key employees or business partners upon completion of the transaction.

W&I Insurance enables a seller to:

  • Reduce the risk of contingent liabilities arising from claims, allowing them to exit a business or investment cleanly.
  • Distribute all or most of the proceeds of sale to their investors or service their existing indebtedness as there is a reduced need for an escrow account.
  • Protect themselves where they have not been actively involved in the management of the target business from unintentional non-disclosure or other breaches of the terms of the SPA.
  • Expedite a sale and potentially increase the purchase price by eliminating obstacles to closing, such as protracted indemnity negotiations.

Cover

The W&I policy, whether seller-side or buyer-side, will indemnify the insured party for loss resulting from a breach of a seller warranty in an SPA or breach of the seller’s obligations in a tax deed of covenant.

Tax Liability Insurance from AIG can reduce or eliminate a loss arising from the successful challenge by a tax authority of a taxpayer’s position.  Potential tax risks are typically identified during due diligence pursuant to a potential acquisition of a company and may have lied dormant within a target for many years.

A buyer may have to proceed with a transaction or investment where there is uncertainty in the application of tax law or inadequate time to obtain an advance tax ruling. The risk for the buyer is that the tax position of the target could be challenged by a tax authority, which could lead to a material reassessment of their liability to tax and could include interest, fines and penalties. Similar issues could arise where a group is rationalising its or its targets corporate structure either pre or post an M&A transaction.

Market

Any company considering a merger, acquisition or restructuring with an identified tax issue.

Features & Benefits

  • Transfers an uncertain liability from the insured to the insurer.
    Reduces the insured’s concerns about a potentially adverse challenge from a tax authority.
  • Transforms contingent and inherently uncertain claims into a quantifiable insurance cost allowing for balance sheet certainty.
  • Has potential application for pre and post M&A restructurings allowing for rationalisation of corporate structures.
  • Facilitates M&A transactions by providing increased fiscal certainty and helping manage negative financial impact.

Cover

Bespoke Tax Liability Insurance can also address:

  • Expenses that may be incurred by the insured in engaging specialised legal and/or accounting advisors in order to resolve the dispute with a tax authority.
  • Interest and insurance fines and penalties as well as additional tax which may fall due if the dispute is lost by the insured.

Litigation Buyout Insurance (LBI) is a tailored insurance product from AIG Europe’s M&A team that quarantines a client from the uncertainties inherent in outstanding litigation whether those uncertainties relate to the outcome or to the eventual amount of damages awarded. LBI will either cap an insured’s financial exposure or remove it altogether and will be designed to meet the particular needs of the insured and the specific characteristics of the dispute.

LBI enables clients to ring-fence liabilities which may arise from any current or anticipated litigation, arbitration or other dispute. This may be particular useful in an M&A context where an unresolved dispute would otherwise prevent an acquisition proceeding or would have a significant impact on the purchase price. An LBI policy can transform the inherently uncertain liability of litigation into a quantifiable insurance cost which can enable the parties to the transaction to focus on the business being acquired.

Underwriting and cover are tailored to each case, allowing the policy to be adapted to a dispute, regardless of its subject matter. As such, LBI can be adapted to cover proceedings ranging from a simple breach of a supply contract, a more complicated employment issue through to highly complex securities litigation and intellectual property disputes.

Market

Any company considering a merger or acquisition or companies with large, identified contingent liabilities.

Features & Benefits

  • Transfers an uncertain liability from the insured to the insurer.
  • Transforms contingent and inherently uncertain claims into a quantifiable insurance cost allowing for balance sheet certainty.
  • Caps future financial risk for the insured.
  • Releases business opportunities previously blocked by claims or disputes.
  • Eliminates potential obstacles to successful M&A transactions.
  • May enable favourable public disclosures, subject to the insurer’s agreement.

Cover

  • Settlement costs.
  • Legal costs.
  • Experts’ costs.
  • Damages.
  • Other potential liabilities arising in the context of a particular dispute.

Claims

AIG has a dedicated claims team in every jurisdiction where we issue policies. This means that any claim made under an M&A policy will be dealt with by an experienced member of our claims team who has particular expertise in dealing with claims in the jurisdiction of the insured.

The local claims handler works closely with the underwriting team to provide a uniquely efficient claims handling process that is tailored to respond appropriately to the complexities of any claim.