The value of global cross-border M&A grew by 45% last year according to BCG’s M&A report released in September 20191, and US buyers, including PE houses, remain especially active – with a particular focus on overseas targets.
At the same time, AIG’s M&A Claims Report reveals we are seeing wider use of insurance products – products that go by many names (M&A insurance, reps and warranties, warranties and indemnities) depending on geography – that may benefit both parties in a transaction.
But when it comes to this product, it is more than the name which varies in different parts of the world. Buyers and sellers need to get their heads around other locational differences to make sure they are moving in the same direction to help ensure a smooth transaction.
Whilst the warranties that are given by sellers relating to target companies in many jurisdictions have similarities (whether in relation to say financial statements, taxation or intellectual property) , the biggest difference between North America and the rest of the world (ROW) in an acquisition revolves around how the disclosure process typically works. The disclosure process is the way in which sellers are able to tell buyers about exceptions or qualifications to the warranties in the sale agreement.
Outside of North America, on insured transactions, it is often the case that the content of the data room – which usually contains all the documentation pertaining to the deal provided by the seller to the buyer – is disclosed. This means the seller will not provide specific exceptions or qualifications to warranties made in the sale agreement. The data rooms can often run to thousands of pages of documents with the onus on the buyer to sift through in order to identify key issues as part of their due diligence process.
In contrast, in North America, the contents of the data room are not disclosed – it basically acts as a repository. Instead, there is a specific disclosure process where the seller will go through every warranty one-by-one and list out specific exceptions and qualifications against each of the warranties. This means a buyer can perhaps have a higher level of confidence that such exceptions and qualifications have specifically been brought to their attention, as opposed to in ROW, where a seller may just rely on the fact that such information was provided in the data room.
An issue can arise when, for example, a US buyer and an Australian seller enter into a deal with different expectations about how the disclosures will be handled. If this comes to light quite late in the process, the result may be an M&A insurance policy that isn’t satisfactory to the buyer. For example, the Australian seller may be expecting just to rely on the general data room disclosure, and so not prepare specific disclosures, which the US buyer will likely be expecting. The result is that the insurer may require data room disclosure - meaning that coverage will be excluded for loss relating to matters disclosed in the data room - which is something very alien (and unattractive) to a US buyer.
The key to avoiding this situation is for the buyer to communicate to the seller that it will be looking for US-style M&A insurance from the get-go, rather than leaving it until the deal is about to sign. This way, the seller can ensure that disclosures are being prepared to the appropriate standard in adequate time.
This is by no means the only difference between North America and ROW M&A insurance coverage. But it’s in everyone’s best interests – buyers, sellers and their brokers, lawyers and advisors – particularly on deals with parties from different parts of the globe, that the disclosure differences between North America and ROW M&A insurance coverage are understood, that expectations are set right from the start, and everyone is reading the same roadmap.
Michael Turnbull - M&A Manager - North America & UK