Alpharoot

Representation & Warranties

Representation & Warranty Insurance, also known as “transitional risk” coverage, protects companies against the growing risk of costly litigation after a merger or acquisition. Mergers and acquisitions are rising; however, so is post-acquisition litigation. Cannabis companies involved in this venture face a multitude of backlash if the deal goes awry.

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Who is R&W Insurance for?

Mergers and acquisitions (M&As) are on the rise. Each year, more and more companies join forces to form healthier and more sustainable organizations. Although this business strategy is desirable and successful, it also comes with a hefty amount of risk. Consider what would happen if a seller’s representation were inaccurate, causing a buyer financial loss. Or if the buyer filed a lawsuit against the seller, alleging a breach in the terms of agreement.

Representations and warranties (R&W) insurance benefits buyers and sellers, protecting both parties from costly litigation by providing capital for legal fees and settlements. Additionally, this policy serves as an excellent negotiating tool, often ensuring more lenient indemnification terms or removing them entirely.

Buyers

An R&W policy can make buyers’ bids seem more attractive, extend the time for the duration, enhance the amount of protection, and improve the buyer’s likelihood of winning a case under this coverage.

Sellers

R&W insurance can improve the condition of the deal, provide a cleaner exit, reduce or eliminate the traditional seller’s indemnity for breach of contract, and offer more extensive coverage without many qualifiers.

Both Parties

Using an R&W insurance policy helps to simplify and speed up negotiation of the acquisition agreement. Plus, it offers more coverage than traditional acquisition agreements offer.

Why you need R&W Insurance?

Safeguards the purchase or sale of a company

Transfers M&A fears and risks from your company to the insurer

Covers the indemnification of specific breaches

62K

According to PwC, announced deals exceeded 62,000 globally in 2021, up an unprecedented 24% from 2020.

77%

Roughly 77% of CEOs expect global economic growth to improve during the year ahead.

82%

Shareholders challenge 82% of M&A deals involving public companies, and private companies experience similar highs.

What does R&W Insurance cover?

Representations and warranties (R&W) insurance benefits buyers and sellers, protecting both parties from costly litigation by providing capital for legal fees and settlements.

Breaches of Purchase Agreement

R&W insurance is generally meant to cover breaches of all general and fundamental representations and warranties within a purchase agreement.

Pre-Closing Tax Indemnities

Pre-closing tax indemnities are generally covered but only to the extent that the seller’s financials are incorrectly calculated.

Seller Fraud

A typical buy-side policy does provide the buyer with the benefit of coverage for seller fraud.

R&W Insurance Considerations

M&A activity is spearheaded by the directors and officers of both the buyer and seller. D&O insurance protects company leaders from personal liability caused by a professional decision or action. With “merger objection claims” by shareholders occurring frequently, adequate D&O coverage is essential throughout the transaction and following the transaction as the parent company moves forward.

An extended reporting period (ERP) or “tail coverage” gives your business protection for claims that are reported after your insurance policy ends. It can be added after canceling insurance or if an insurer doesn’t renew a policy, which is a standard action by the company being acquired once the M&A transaction is complete. Furthermore, post-acquisition is the most popular time for lawsuits. As a result, tail coverage offers insureds an additional three to six years of protection. This extension allows you to report claims post-acquisition for alleged wrongdoings pre-acquisition by the seller that happened before the merger.

Fiduciary Liability (FID) is an excellent insurance vehicle for protecting individuals charged with creating, managing, and administering employee benefit plans. Considering the benefits of 401k plans, employee stock ownership plans, or healthcare plans, benefit plan administrators are fiduciaries. These responsibilities and procedures are most certainly challenged when onboarding new employees from a merger.

R&W Insurance Considerations

R&W Insurance Claim Examples?

Inaccurate Representations

If a buyer discovers that a sellers’ representations were inaccurate, and the buyer suffers a financial loss, a massive lawsuit typically ensues.

Employment-Related Lawsuit

Post-acquisition companies typically have many more employment practice risks to navigate, and with so many changes, employees could quickly become offended by new leadership actions. In the current legal landscape, we recommend this labor law coverage as standard coverage for companies with any number of employees. Especially when onboarding new employees to a company they did not initially sign on to work for.

Transitional Coverage

Unsurprisingly, many executives understand the necessary insurance coverages for a successful merger or acquisition. However, these coverages often drop off once the parent company takes over and creates a significant exposure if a lawsuit arises for actions of the acquired before merging.

R&W Insurance FAQ’s?

The cost of R&W Insurance depends on your company’s unique needs and the details of your upcoming M&A deal. Working with a seasoned insurance professional is the best way to ensure you get the coverage you need.

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