Are you asking yourself ‘do I need M&A insurance’? While global conditions for mergers and acquisitions have been tough in recent years, deal-making continues at a significant level. However, transactions like these are rarely stress-free. Even the most promising deals can encounter significant headwinds such as challenging regulatory and tax requirements, an uncertain political environment, and M&A litigation.
Take the case of Online Resources Corporation (ORC). On August 10, 2007, the company acquired Internet Transaction Solutions (ITS) for $45 million.
Shareholders were given the choice between receiving payment for their shares in the form of cash or ORC stock, or both. Out of the total $45 million purchase price, the shareholders opted to receive approximately $24.7 million worth of ORC stock. The balance, which amounted to approximately $20.3 million, was paid in cash.
On December 19, 2008, Kent D. Stuckey, the former Chief Executive Officer and Chairman of ITS, filed a lawsuit against ORC in the U.S. District Court for the Southern District of Ohio. The suit was filed in a representative capacity on behalf of all former ITS stockholders. In his complaint, Stuckey alleged that ORC breached its agreement to register, under the Securities, Act of 1933, as amended, the company shares that were issued to the former ITS shareholders, as partial consideration for ORC’s acquisition of ITS. He added that ORC also committed fraud in connection with the acquisition of ITS, and cited its failure to register the company shares issued in the acquisition. In addition, he blamed ORC for failing to timely process stock transfer requests, and for breaching certain price protection provisions in the merger agreement.
After a four-year legal battle, the court awarded Stuckey a total of $18 million in damages for the breach of contract claim and the breach of the price protection provisions in the merger agreement.
Stuckey v. Online Resources Corp. is a perfect example of what could go wrong in a deal. It also demonstrates that M&A litigation can result in huge payouts.
Recent studies show that the frequency of M&A insurance claims is rising. In its study of Representations and Warranties claims, AIG pegs the average payout on the most severe category of claims at more than $20 million.
So, is M&A insurance really necessary? The $18-million ORC payout and many other multi-million dollar M&A-related losses seem to point to a big YES.
M&A insurance or representations and warranties insurance refers to a type of coverage designed to guarantee the contractual representations made by sellers associated with corporate mergers and acquisitions. According to the International Risk Management Institute (IRMI), “the key benefit of the policies is that they provide a viable alternative to escrow funds, which have traditionally used to satisfy claims associated with representations and warranties contained in merger and acquisition documents.”
Even in the early stages of M&A negotiations, companies must consider the key roles that insurance can play. For example, companies can start by identifying facets where insurance can offer transaction solutions.
The increasing uptake of M&A insurance in previous years demonstrates that more buyers are embracing this type of insurance.
On April 26, 2018, Advisen will host the 2018 Transaction Insurance Insights Conference with the theme: “The lifecycle of an M&A insurance transaction: A practical guide”.
The conference will follow a fictional M&A transaction through its lifecycle: from engaging a banker and the auction process, through due diligence and negotiating insurance coverage – all the way to handling claims, disputes and arbitrations from breaches of warranties or indemnities.
The one-day program will include speakers from the M&A world and insurance sector, who will assess the application and value of insurance coverage throughout the lifecycle of a transaction.
To know more about M&A insurance, join the discussion. Registration is now open for the 2018 Advisen Transaction Insurance Conference.
