After a record-breaking spike in merger and acquisition (M&A) activity in 2021 to $5.9 trillion1, current global economic volatility has reduced the volume of deals in 2023 significantly, with first quarter volume of only $559 billion2. Climbing interest rates, geopolitical conflict, supply chain volatility and evolving regulation are all shaping the short-term economic outlook and directly impacting M&A deals. Amid these challenges, dealmakers also have to deal with the financial burden of litigation.
The threat of litigation can affect the valuation of a company, making an otherwise attractive deal stall, be renegotiated or fail completely. How buyers and sellers deal with that risk can go a long way toward the success of a deal. But beyond just simple preservation of deal flow, managing litigation risk properly can have other benefits.
Here we discuss the strategy behind the use of litigation insurance and how it can enhance M&A deal opportunities for your firm.
Mitigating Litigation Risk on M&A Deals
Just the threat of litigation or arbitration claims can impact asset valuations and limit market appetite. Buyers may seek escrows, indemnities or price chips, or even back away from a deal entirely if a company has risk of material judgments against it. Similarly, if a target has a favorable judgment or arbitral award that is not final, buyers may be reluctant to pay full value for that award. In such an environment, litigation is problematic for both buyers and sellers. Add to this tighter and more expensive financing, and the importance of mitigating litigation risk becomes even clearer. The two main types of insurance that are available on the risk transfer market are:
- Adverse judgment insurance — defense-side coverage for companies facing or involved in a potential lawsuit can purchase this to cover a damages award if ordered to pay one.
- Judgment preservation insurance — coverage that allows businesses that have won judgements to lock in those favorable results by paying out if the verdicts are reversed on appeal.
Companies can use these to mitigate risk, unlock capital and ensure that deals happen on the best possible terms.