AIG, Goldman Sachs and Credit Default Swap News Notwithstanding, There Still is a Place for Transaction Insurance - in M&A Deals that is
Recently, there has been a lot of unwanted attention on the credit default swap market and its role in contributing to the economic meltdown and need for Wall Street bailouts. It is beyond our scope today to comment on whether one person's portfolio insurance or hedging is another's bet at a casino. However, I can say from personal experience that there is a sensible and useful role for insuring the unknowns involved with the purchase and sale of a business.
On several occasions, I have arranged so-called "representation and warranty" or environmental insurance policies in connection with mergers and acquisitions matters. These facilitated reaching the closing by providing assurances that certain risks would be capped and assets would be available if contingencies materialized. In other words, if it turned out that there were hidden problems with the acquired assets or problems that were worse than expected, such as accounting, product liability or regulatory compliance issues, then there would be a mechanism in place.
For example, when a family business that had numerous shareholders was being sold, both the buyers and sellers found the insurance option appealing. The sellers wanted to fund their retirements and estate plans and not have potential post-closing liabilities hanging over their heads for the typical one to three or more years that indemnifications remain in place. Likewise, the buyer, and its lender, preferred to seek a claim against one large, creditworthy institution rather several, dispersed individuals of uncertain wherewithal.
In another instance, the seller was a subsidiary of a foreign corporation and was liquidating its U.S. businesses and assets. The buyer also was a foreign company and was inexperienced with evaluating and assessing the potential liabilities of acquiring a manufacturing business. So, the buyer insisted upon procurement of an insurance policy to cover the risks that long-term cleanups of groundwater contamination would exceed the available estimates.
Insurance can be an excellent tool for helping close deals. But, it is important to understand that it is not a magic wand. Before a reputable insurer will take these risks from the shoulders of the parties, it will want to do thorough due diligence, which can be time consuming and require additional work by lawyers and other advisors. And, of course, the insurer will charge a substantial premium. Still, the comfort from having a solution in place from day one, can be well worth the effort and expense.
Jeremy A. Gibson & Associates, P.C. handles mergers and acquisitions matters such as the one discussed above. We are available to serve and meet with clients throughout the Chicago, Illinois area, including Arlington Heights, Buffalo Grove, Deerfield, Des Plaines, Evanston, Glenview, Highland Park, Hinsdale, Lake Forest, Libertyville, Mount Prospect, Naperville, Northbrook, Oak Brook, Palatine, Rolling Meadows, Schaumburg, Skokie, Oak Brook, Oak Park, Vernon Hills, Waukegan, Wheeling and Wilmette. Contact us anytime for a complimentary consultation with a Chicago corporate lawyer.