Change of the legal positions and optimizing risk allocation between the parties in M&A transactions through W&I insurance

Abstract

A mergers and acquisitions are a complex process involving many risks for the parties. There are uncertainties regarding the legal position of the buyer and seller in Danish law. To overcome these risks, W&I insurance can assist allocate the risk between the parties' obligations.

This thesis seeks to answer what the legal position of the parties according to the Danish Act on Sale of Goods § 47 is in connection with M&A, and how the legal position of the parties’ changes through a W&I insurance. To answer these questions, it will first be examined to which degree the buyer is obligated to conduct a due diligence prior to the acquisition and sellers’ obligations to inform the buyer of significant matters. Hereafter it will be derived how the parties’ obligations and their legal position will change due to a W&I insurance. Further, the thesis seeks to conclude through economic theories how the parties’ legal position and allocation of risk can be optimized. The key feature of the W&I insurance is that the insurance company becomes liable to the buyer for any breach of warranties.

The W&I insurance assists reducing the risks in relation to the M&A transactions, as neither the buyer nor the seller have incentive to carry the responsibility for potential breaches of warranties related to the target company.

The thesis shows that it is more efficient to investigate and allocate risks before reaching closure of the agreement instead of using resources to invoke any breaches of the contract. It is concluded that a W&I insurance can contribute to optimize the allocation of risks between the parties and in this connection improve both the buyer and seller’s legal position. In relation to underwrite the insurance, both the buyer and the seller must profoundly go through the insurance policy for the understanding of the insurance conditions. The W&I insurance is associated with high costs for the parties, which should be included in the total costs of the transfer.