Handling of Risks in M&A Transactions in Which Warranty & Indemnity Insurances Coverage is being Provided

Amanda Merser

Student thesis: Master thesis

Abstract

The purpose of this thesis is to assess (i) how the seller and the buyer in an M&A transaction can reduce their risk exposure through warranties and indemnities and, in particular, through W&I insurance coverage, (ii) which optimal strategies the seller and the buyer should apply in relation to risk mitigation, including, the scope of their due diligence efforts, the contents of the warranty schedule included in the sales and purchase agreement, as well as the influence from the W&I insurance on such strategies and (iii) under which circumstances the presence of a W&I insurance may increase the total value of an M&A transaction. The legal analysis of this thesis is carried out by means of the legal dogmatic method. The sales and purchase agreement between the seller and the buyer, as well as the insurance policy between the buyer and the insurance company, are subject to freedom of contract which means that the terms agreed between the parties involved are, by far, the most important source of law when establishing their respective legal positions. In addition, the implications of the relevant sections of the Danish Act on Insurance Agreements (“forsikringsaftaleloven”) are being analyzed in the context of the buyer providing false, misleading or insufficient information concerning the target company to the insurance company. The key feature of the W&I insurance is the fact that the insurance company becomes directly responsible vis-à- vis the buyer for any breach by the seller of relevant parts of the warranty schedule. The insurance company holds a right of recourse against the seller but only if it can be proven that the seller has willfully provided false or misleading information during the M&A process. The economic analysis is based mainly on the principal/agent-theory and is carried out through a comparison of the optimal strategies of the seller and the buyer, respectively, with and without the presence of a W&I-insurance. It is concluded, inter alia, that when a W&I insurance is being contemplated in the context of a given M&A transaction, the seller is, generally, willing to grant more and broader warranties and indemnities in favor of the buyer, especially in areas where one or both parties seem to have a lack of knowledge and awareness of potential risks. Finally, in the integrated analysis, combining the findings from the legal and the economic analysis, a comparison of pros and cons of W&I insurances is being made, leading to the overall conclusion that, in many M&A transactions of a certain size or type, a W&I insurance will be in the joint interest of the seller and the buyer, due to its potential for creating added value mainly through (i) less need for escrow accounts, (ii) a lower risk of subsequent disputes between the seller and the buyer and (iii) fewer M&A negotiations dragging out or being abandoned due to the parties ́ failure to agree on the warranty catalogue and/or the payment terms.

EducationsMSc in Commercial Law, (Graduate Programme) Final Thesis
LanguageDanish
Publication date2017
Number of pages136
SupervisorsHenrik Lando