DAMAGES IN POST-M&A AND W&I INSURANCE DISPUTES

CD: In your experience, what issues most often lead to post-M&A disputes between buyer and seller? What factors typically trigger a W&I-related claim?

Dass: In general terms, post-M&A disputes between buyer and seller usually arise when the buyer becomes aware of certain issues that it had not been aware of at the time of the transaction, and issues that negatively impact the financial stability and continuing operations of the acquired entity, such as future financial performance. Examples of recent post-M&A disputes provide insight into the variety of issues between buyer and seller. These include allegedly corrupt practices prior to the acquisition that has led to potential regulatory consequences following the acquisition, accounting irregularities that allegedly impacted the previous years’ profits and consequently the purchase price, and alleged irregularities in statutory social security contributions which led to some longstanding employees not receiving their retirement or health benefits, which, in turn, resulted in the purchaser having to compensate workers that had been impacted.

CD: Could you provide an overview of the role a tailored warranty and indemnity (W&I) insurance product plays in a post-M&A dispute?

Dass: In summary, an insurer steps into the shoes of the seller when the sale and purchase agreement (SPA) covers warranty and indemnity (W&I) insurance. This means that in the event of a breach of warranty where an unexpected issue arises in the acquired company, the buyer usually files a claim with the insurer rather than the seller. W&I policies have become increasingly common and can be purchased by either the buyer or the seller. In a recent case, the private equity seller had distributed the sales proceeds to its shareholders. The W&I policy offered protection to both the seller and the buyer – the seller did not have to raise additional financing to fund the claim and the buyer was not exposed to the seller’s risk of solvency.

Apr-Jun 2022 issue

Ankura