W&I Insurance for Take-Private Transactions

 

Gap in Protection
Historically, buyers attempting to take a public company private have often had to accept limited contractual warranty protection when engaging in such transactions. Although many buyers would like to negotiate a comprehensive warranty package, they are often faced with practical issues and various arguments from sellers, including:

• Absence of an appropriate warrantor: It may be difficult to identify an appropriate party that is qualified and willing to provide target business warranties to the buyer. Even if a warrantor (or multiple warrantors) can be identified, they will likely only bear liability for breaches of warranties in respect of their own proportion of the sale. There are also challenges with imposing the burden of providing the warranties on the target itself, or on target management.

• Argument that public mergers and acquisitions (M&A) are inherently less risky: Sellers may argue that the buyer should derive sufficient comfort from public disclosures and heightened regulation. Disclosure obligations can be very comprehensive, and public companies are subject to a high level of regulatory and public scrutiny, which sellers will argue serve as a substitute to private buy-out style disclosure and diligence.

• Issues with disclosure: Sellers may also argue that they are unable to make comprehensive disclosures to the buyer, creating a dynamic that makes provision of comprehensive warranties and disclosure against them difficult.

 

Addressing the Gap
Aon has advised and placed several warranty and indemnity (W&I) insurance policies in take-private and other public M&A scenarios, subverting the status quo of limited recourse, and providing buyers with a warranty protection package that is very similar to what buyers would be used to seeing in private buy-out deals.

Aon has advised on a variety of transaction structures in the public M&A context, including:

• When the sale and purchase agreement (SPA) trigger a mandatory general offer: The SPA between the buyer and substantial shareholder(s) triggering a mandatory general offer and subsequent squeeze out - in this case, the warranties would typically be contained in the SPA and provided by the substantial shareholder(s).

• Voluntary general offer: Where the buyer implements a voluntary general offer at the outset to the target’s shareholders at large, the buyer and certain shareholders would typically sign an irrevocable undertaking or other similar agreement under which certain shareholders would agree to exercise their option to accept any general offer subject to agreed parameters, and such irrevocable undertaking can contain the warranties to be insured.

• Scheme of arrangement: A take-private transaction by way of a court-appointed scheme, where the buyer and substantial shareholder(s) may enter into a framework agreement or implementation agreement under which the sell-side can provide warranties to the buyer to be insured.

 

In each of these cases, the sell-side warrantors would typically give warranties only on a nil-recourse basis, and as a secondary and concurrent limitation, would want to make clear that their warranties are provided only in respect of their respective sale proportions. Notwithstanding this dynamic, W&I insurance is able to provide comprehensive protection for the buyer. Aon works with clients to structure a policy whereby the buyer enjoys coverage for its full investment stake irrespective of any such contractual limitations to warrantor liability.

Key Points when Implementing W&I in the Public M&A Context
Based on Aon’s experience, key learnings to consider include:

• Policy structuring: The ultimate buyer investment stake may not be known at the time when the definitive transaction document is executed, and when the W&I insurance is put into place. Aon has been able to structure flexible W&I policy programs that can accommodate uncertain future investment scenarios such that policy parameters can be adjusted according to the eventual outcome of any general offer or other scheme so that the buyer does not have to accept any uncertainty in policy parameters even in the face of inherent uncertainty of transaction outcome.

• Disclosure and diligence: As with all W&I insurance processes, the underwriter will expect to see a level and quality of disclosure and diligence that is commensurate to the warranties that they are being asked to cover. Underwriters will factor in diligence conducted on public disclosure information and make some allowance for the fact that certain information cannot be disclosed, but the underlying principle remains broadly the same. Aon is well versed in managing such issues to optimise coverage outcomes.

• Synthetic warranties/identifying an appropriate warrantor: In the event that there is no party comfortable to provide the warranties, even on a nil-recourse basis, Aon has been able to structure policies that cover ‘synthetic’ warranties, i.e. warranties that are synthetically drafted into the W&I policy for the purposes of insurance coverage and are not actually provided by any transaction party or contained in the transaction documents. Appetite for ‘synthetic’ W&I policies is significantly more limited than conventional W&I policies, and pricing can also be higher. This is why it is always preferable to socialise the construct of the conventional W&I policy and provision of warranties on a nil-recourse basis with the sell-side, with a view to identifying a suitable warrantor.

 

Effective Tool for Contractual Protection
Aon has structured several W&I policies for take-private transactions and is seeing usage of W&I insurance in this context on the rise in Asia. When implemented correctly, W&I insurance can be a very effective tool to provide investors with fulsome contractual protection, which can have a fundamentally positive impact on the way investors view take-private opportunities and other opportunities to invest in public listed businesses (short of a privatisation).
It is also a valuable tool for sellers to unlock greater and more diverse opportunities to transact, as it provides prospective buyers with the certainty of recourse against a highly-rated insurance company and a comprehensive suite of warranties that sellers would not have otherwise been in a position to provide.

For additional information contact:

Lee Xianwei
Head of Aon M&A and Transaction Solutions, Asia
[email protected]

Blossom Lim
Growth Leader, Aon M&A and Transaction Solutions, Asia
[email protected]