M&A DISPUTES: HOW DO YOU VALUE A BAD BARGAIN?
In private M&A transactions, the key protections for buyers of companies take the form of warranties and indemnities given in the sale & purchase agreement (SPA) or in an accompanying warranty deed. In some transactions, the seller will insist on giving very limited warranty protection beyond fundamental warranties as to its ownership of the company and legal capacity to complete the sale. In other transactions, the warranties will be fiercely negotiated with the buyer seeking a wider suite of contractually binding assurances about the condition of the company at the point of sale (particularly if limited due diligence has been undertaken). In contrast to warranties, which are designed to protect the buyer from unknown issues, indemnities are specifically included to indemnify the buyer against losses associated with known exposures: for example, an ongoing piece of litigation against the company.
Given their function, it is hardly a surprise that claims for breach of warranty or indemnification are a prominent feature of the M&A disputes landscape. Each year, it is typical for several such claims to be decided in the High Court. A further indication of their high incidence comes from the publically available statistics on the frequency of notifications under warranty and indemnity (W&I) insurance policies. According to a recent study published by a leading W&I broker, claims notifications have increased by 300 percent between 2016 and 2018, with 17 percent of insured deals with a value in excess of US$1bn experiencing a notification. As the main purpose of W&I insurance is to cover losses arising from breaches of warranty, this is good evidence that significant breach of warranty claims are as common as they have ever been, if not more so.
Oct-Dec 2019 issue
Norton Rose Fulbright LLP