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Transaction show-stoppers - how a specialist insurance solution could save the day
Let’s be clear about this - these are not times for the faint-hearted transactional adviser.
As we all know, getting corporate, commercial or property deals to bed is never easy but in today’s financial conditions, it’s like trying to catch a wet bar of soap with your eyes closed.
Deals falter for many different reasons - some technical, some financial, some personal - but before you prepare your file for the basement and wonder how you are going to slip the WIP write-off past your managing partner, spare a thought for the range of specialist insurance based solutions that can now be brought to bear to help clear a transaction hurdle.
As specialist insurance lawyers, working to the brief of the transactional lawyer or accountant leading the deal, we have played a part in helping to remove many potential transaction show-stoppers over the years and prevented many deals from dropping off the cliff. Our involvement can provide a win-win for both the client (who just wants the deal to happen) and the deal-leader (who, more often than not, has a success fee at stake).
Here are some examples of the solutions we have been able to access from the specialist insurance markets and implement for those we work alongside:
Regulatory Breaches – Where a company being sold carries on regulated insurance activity, the due diligence process can sometimes throw up potential regulatory breaches. In a recent case we handled for a law firm acting on the sale of such a company, the buyer’s VC backer threatened to withdraw the day before completion in the absence of reassurance on the issue. Working through the night, we carried out a detailed analysis of the facts and presented a report to the completion meeting confirming the nature of the breach, that it was technical rather than fundamental and outlining the FSA’s options and most likely outcome. The VC backer agreed and the deal completed on time.
Contingent Risks – Bespoke insurance solutions are available for specific risks, usually identified during a transaction, which potentially adversely affect the transaction itself or the enterprise value of the target going forward. Typical risks that can be considered include litigation proceedings, planning issues and employment issues. By way of example, our involvement in a major leisure development project, working alongside the transaction lawyers acting for the local authority land-owner, assisted in putting an innovative insurance structure in place to manage the unique risks arising from the project and unlocked a regeneration scheme that had been stymied for many years.
Warranty & Indemnity Risks – Insurance is available to protect a buyer or seller against loss arising from breach of warranties and indemnities in transaction documentation. It typically covers loss discovered up to seven years after exchange and/or completion and enables a clean exit for a seller and/or enhanced protection for a buyer. It is particularly effective at reducing the risk of a price chip where certain shareholders (e.g. VCs) are unwilling to provide warranties. We aim to lift the burden of finding, structuring and delivering the right policy, at the right price and on the right terms. Our most recent case averted an almost certain £10 million price chip and took just 10 days to deliver.
Nasty Insurance Clauses – On occasions, removing a show-stopper can be as simple as conducting a technical or strategic review of a complex insuring provision in a commercial contract such as a joint venture, outsourcing agreement, service agreement, purchase or supply agreement, distribution agreement or PFI/PPP agreement. More often than not we find ourselves working alongside a transaction lawyer to advise on how to shift insuring obligations to another party, how to structure a project specific insurance policy, how to tackle uninsurability issues in long term agreements. If we are really lucky, we get to deal with exciting issues such as double insurance, primary insurance, ring-fencing, non vitiation and subrogation waiver.
Environmental Risks – Environmental liability insurance can sound like a panacea for all ills, which of course it is not. It can, however, play a role in unlocking corporate, commercial and property deals. The trick is to properly assess the dynamics of the transaction and the contract documentation and to identify precisely what risks need to be transferred from the parties to the insurance markets. Only then can the right type of policy be sourced and the policy wording negotiated to deliver a seamless solution. Structured correctly, it can reduce price chipping and, in some cases, prevent a deal from falling over.
Deferred Consideration Risks – Insurance is available to protect a seller who is concerned at a buyer’s financial ability to pay deferred consideration. This solution can unlock a deal where the buyer can’t or won’t pay up front and the seller wants to hedge the risk rather than walk away. We use our market contacts to find the right insurance markets and deliver the solution on the right terms.
Tax Liabilities – Insurance is available to underwrite the financial impact of a successful challenge by the tax authorities of tax positions adopted in a whole range of corporate, commercial and property transactions. It is a highly complex area but this solution can be very effective in helping clients to commit to deals and sleep easier at night.
Loss of Group Insurance Protection – Companies that are being bought out of a group company structure can find themselves very exposed in the insurance market, post deal. We can help with advice on how to anticipate and deal with this and explore potential transitional arrangements.
Pension Deficits – Of all the issues likely to throw a major spanner in the works, the pension deficit liability of a defined benefit scheme can be one of the most troublesome. Working with specialist pensions lawyers, accountants and actuaries, we have developed some innovative ways of underwriting a recovery plan in a way that potentially satisfies the needs and responsibilities of the sponsoring employer, the pension fund trustees and the Pensions Regulator, whilst reducing the risk of a trapped surplus.
But surely, we hear you say, these solutions are the domain of the client’s insurance brokers?
To a degree, you are right. But even the best insurance brokers are not qualified or insured to provide legal or regulatory advice - and the starting point for all these solutions is a careful analysis of the legal and regulatory issues at stake and a technical review of the transaction structure and documentation. Only then, can a decision be made as to what type of solution is appropriate and how best to identify the right specialist insurance broker to access the right insurance market.
So next time a deal starts to wobble, perhaps it might be worth giving us a call to see if we can help you keep the plates spinning and make sure the show goes on.
