The Hidden Dangers in No or Low Indemnity M&A Deals
Many M&A transactions now use R&W Insurance as a substitute for seller indemnity. This article briefly discusses considerations for M&A practitioners when confronted with R&W insurance exclusions.
The following are some of the most common exclusions:
- Environmental (if Phase I’s or diligence evidences contamination);
- Employee matters such as wage & hour claims (typically limited to California), independent contractor status;
- Pending litigation, investigations and/or audits;
- Certain tax matters such as the validity and amount of NOLs, and historical liability if acquired company was previously part of a consolidated group or is now being acquired from a consolidated group;
- Underfunded pensions plans and multi-employer withdrawal liability;
- Product or professional liability; and,
- Matters “red flagged” as problems or otherwise ignored in due diligence.
Although buyers and sellers may intend to use the R&W insurance to reduce and transfer the risk of a breach to the R&W insurance policy, the existence of exclusions requires the parties to behave and negotiate for protection as if the R&W insurance may not apply to disclosed matters that are perceived to have heightened risk.