Nowadays, competitive sale processes usually enable vendors to insist on “nil recourse” transactions, leaving buyers little scope to sue for breach of warranties. Even so, vendors must consider how buyers will mitigate their risks around warranties and indemnities. Increasingly, that means taking out W&I insurance, giving the buyer protection and allowing the seller a “clean exit” with minimal residual liability.
Although it is successful bidders that buy W&I insurance, sellers should regard arranging cover as part of their role, says Harry Leitch, Head of Deal Origination, Private Equity, M&A and Tax at specialist broker BMS.
“There’s a number of reasons why the seller would start the process of putting W&I cover in place,” he says. “One is to save time when they’re running an auction process with several bidders. Another is when the deal is in a sector or of a particularly large size ($2bn+) where the number of insurers prepared to underwrite it is smaller, so as the seller you want to control the narrative on insurance.” Talking to insurers can also provide valuable insights into potential buyers’ perspectives on the transaction, he adds.
Sellers usually start the insurance process as early as possible and having secured one or more offers of cover, “flip” them to the successful bidder before the deal is signed. This removes another of the obstacles that could hold the process up. But as with every other aspect of deal readiness, successfully addressing W&I issues means having your data room organised well in advance so that underwriters can understand the transaction and provide indicative offers.
This is especially true today, when M&A markets are extremely busy and underwriters can afford to be selective about what deals they insure. A poorly organised data room makes for a less attractive proposition.