In the complex world of mergers and acquisitions (M&A), the excitement of closing a deal can be quickly overshadowed by post-closing financial liabilities. To help mitigate the risks associated with breaching any representations and warranties, both buyers and sellers may turn to representations and warranties insurance (RWI), a specialized business insurance policy that’s designed to help safeguard against inaccuracies made in statements during the M&A transaction process.
The Role of Representations and Warranties in M&A
During a merger or acquisition, both parties involved in the transaction make statements, promises and claims about their business. Known as representations and warranties, these are assurances regarding various aspects of the business, such as finances, taxes, contractual obligations, intellectual property, litigation and compliance. Misrepresenting any aspect of the business during this time could lead to significant financial losses for both the buyer and the seller.
Typically, the seller will indemnify the buyer against losses resulting from such breaches, which often requires the seller to set aside a substantial amount of capital in escrow. However, without representations and warranties insurance, there’s no guarantee that this indemnification will be sufficient or actionable, especially if the seller’s obligations do not survive the closing. That’s where representations and warranties insurance comes in.
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Representations and Warranties Insurance Can Benefit All Parties
In the world of mergers and acquisitions, each step of the process carries its own set of risks. RWI can help ensure that missteps and unforeseen errors do not derail the transaction by transferring the risk associated with representations and warranties to an insurance carrier. In doing so, it may facilitate a smoother transaction and offer peace of mind to both parties.
Protection For Sellers
- Reduces Liability from Future Claims: RWI can help reduce the risk of future claims related to representations or warranties made during the sale process.
- Distributes Proceeds to Investors: Without insurance, the seller may need to set aside a portion of the proceeds of the sale to cover potential indemnity claims, but with RWI, the seller can distribute more of the proceeds to investors.
- Protects Passive Sellers: Passive sellers (those who are not involved in the management of the company) could be held liable for breaches of representations and warranties, but RWI can help protect them from financial losses.
- Expedites Sale Process: By reducing the need for lengthy negotiations over indemnity provisions and offering added security to buyers, RWI could lead to faster and smoother transactions.
Protection For Buyers
- Supplements Indemnification: While sellers typically provide indemnification for breaches, RWI can supplement existing indemnification to provide extra financial protection to buyers.
- Extends Indemnification Duration: Indemnification periods in merger and acquisition agreements are often limited in duration. Depending on the policy terms, representations and warranties insurance may extend the duration of coverage.
- Gives a Competitive Advantage: In bidding situations, a buyer who includes RWI as part of their offer can stand out from the crowd. Including this coverage may show that the buyer is serious about protecting their investment, which could make their bid more attractive to the seller.
- Preserves Relationships: RWI may protect the relationship between the buyer and seller by minimizing disputes over indemnification claims, helping to facilitate a smoother transition with sellers who might become future business partners.
Take the Next Step with Business Insurance Solutions
At Higginbotham, we offer more than just insurance. We provide a holistic approach to business and personal insurance, risk management, employee benefits and HR services. By understanding your priorities and streamlining processes, we work to ensure that you receive unparalleled value and service.
Interested in learning more about how RWI can help protect your next M&A transaction? Talk to one of our business insurance specialists today to discuss your insurance and risk management needs.
