Mega Capital has an Insurance Division which advises a number of listed and unlisted companies in relation to their Transactional insurance requirements.
This Division currently offers assistance with a number of transactional insurance products, as follows:
- Warranties and Indemnity (W&I) insurance;
- Prospectus Liability Insurance; and
- Specific Transactional Insurance policies, namely
- Tax Liability
- Environmental Liability, and
- Litigation Buyout.
W&I insurance protects Buyers and Sellers against financial loss by eliminating or mitigating exposures to inaccuracies in, or contingent risks relating to, warranties given in a Sale and Purchase Agreement (SPA).
A Buy side W&I policy can indemnify a Buyer for losses caused by breaches of warranties given by the Seller in the SPA. Under this type of policy the Buyer is able to claim directly from the insurer without first pursuing the Seller. A Buy side W&I policy will also cover legal defence costs incurred in defending third party insured claims.
A Sell side W&I policy can indemnify the Seller for losses resulting from claims made by the Buyer for breaches of warranties in the SPA. Under this type of policy the Seller is protected from claims that might threaten its sale proceeds. A Sell side W&I policy will also cover legal defence costs incurred in defending an insured claim.
The purpose of W&I insurance is to provide cover for losses or liabilities that arose prior to the date on which the warranties were given and which may be unknown, unidentified or undisclosed. W&I insurance does not cover forward looking warranties or performance guarantees. In addition, under a Sell side policy, W&I insurance does not cover fraud of the insured and matters known by the insured.
Each W&I policy is tailored to meet the specific coverage requirements of the transaction at hand.
In certain circumstances a Buyer or a Seller may not be able to reach the required level of comfort in relation to the warranties involved in the transaction. Issues relating to warranties can become ‘deal breakers’ and the parties may become bogged down in finding ways to commercially address these issues.
W&I insurance can be used to break the deadlock by removing exposure to unknown and unforseen elements. Where W&I insurance is introduced early in the transaction it can be used as a strategic tool in structuring the deal and negotiating the terms of the SPA. W&I insurance can therefore be used not only in the traditional risk transfer sense but also as a tool to enhance the transaction.
Further benefits of W&I insurance include:
Where Buy side policy is purchased:
- warranty survival period and/ or warranty cap can be extended; and
- shareholders and analysts reassured by reducing deal risk.
Where Sell side policy is purchased:
- post closing liabilities and disputes eliminated or minimised;
- all sale proceeds available at completion;
- no long term liability;
- leverage for higher purchase price created by transferring risk to the insurer;
- ability to offer “cleaner” target;
- ability to bridge warranty gap between Seller and Buyer; and
- ability of trustees/ nominees to provide warranties.
Prospectus Liability Insurance
When an entity raises capital by offering securities to the public or by way of a private placement, its directors and officers, the entity itself, selling shareholders and their advisors can face a range of potential liabilities arising from the capital raising.
Prospectus Liability Insurance can provide protection against potential liabilities arising out of:
- claims relating to the information contained in the Disclosure Document used for the capital raising (eg claims relating to false or misleading statements, misrepresentations, errors or omissions);
- claims relating to prior activities in connection with the capital raising (eg negotiations, discussions and decisions);
- breach of warranties or indemnities contained in the Underwriting Agreement / Placement Agreement; and
- legal and other defence costs incurred in connection with a claim made against the insured.
- significant limits of liability can be purchased for up to 7 years providing appropriate single long term cover;
- ring fencing the risks involved in the capital raising thereby protecting the D&O policy by preserving that policy?s limit to deal with other exposures;
- enhancement of cover for direct claims associated with the capital raising by protection of the entity against claims arising due to the entity’s indemnification of its directors and officers;
- assurance for directors and officers who are indemnified by the entity, that the entity has in place a sufficient level of cover for any capital raising related claims made against them;
- segregation of directors and officers personal liability from possible future fluctuation in the insurance market or change in management attitude; and
- capitalisation of policy premium, in certain circumstances, as part of the capital raising cost.
Specific Transactional Insurance
Mega Capital can also arrange specific transactional insurance in order to address specific risks which arise in M&A transactions and which may become “deal breakers”.
- Tax Liability insurance – during the due diligence phase of a transaction conducted to a very tight time table, the target reveals a potential tax issue with an estimated liability of a number of million of dollars. The SPA is in a near complete form but does not included appropriate tax warranties. The buyer seeks protection and the parties cannot close the deal without resolving the issue which would require further, time-consuming negotiations. A solution to the problem is to issue a seller-side tax liability policy tailored specifically to protect the buyer from the “known” tax issue thereby enabling the parties to close the deal within the required time frame.
- Litigation Buyout insurance – uncertainty surrounding litigation that is pending in a target business has become the ‘deal breaker’ in the final negotiations of the SPA. The buyer is not willing to acquire the target business with litigation on the horizon and wants a full indemnity, which the seller is not willing to provide. A solution to the problem is to purchase a Litigation Buyout insurance policy that effectively provides “catastrophe” protection should the litigation turn out to be higher than expected.
- Environmental Insurance “a factory is being purchased. Environmental due diligence reveals groundwater contamination caused 30 years earlier. The contamination involves significant clean-up costs to which the buyer may be exposed as the original polluter no longer exists and the seller is unwilling to factor this potential cost into the transaction. An environmental policy can be structured to protect the buyer from the potential risk of having to clean up the contamination and the associated costs.”