Law firms play a critical role in facilitating M&A’s and managing the associated risks for their clients; however, it is estimated that between 70-90% of UK deals fail, with the vast majority of these being in the SME space.
There are now Transaction Liability Insurance (TLI) products available which are specifically designed for small business M&A transactions with an Enterprise Value (EV) up to GBP 30M, which can be put in place quickly and with minimal input on the part of the buyer/seller; cover can also be arranged post-completion.
TLI can help smooth common impasse situations that arise in the negotiation process by providing peace of mind to the buyer and seller, that in the event of a warranty or statement given in the SPA being breached/inaccurate, a TLI policy can step in to address the reimbursement obligation, enabling the insured to claim against the policy rather than the other party.
Who can benefit from TLI?
- Sellers – ensure a clean exit and transfer potential post transaction liabilities to the insurer, removing or reducing the need for extensive escrow arrangements.
- Buyers – gives comfort that indemnification is in place to protect again unknown risks and liabilities.
- PE firms – helps mitigate risk and enhance deal value.
What cover is available?
Seller Policy: Covers the seller for innocent misrepresentation of warranties given to the buyer in an SME share or asset sale. All warranties are covered without amendment. The buyer is added as a loss payee so that they can directly receive any insurance proceeds in the event of a claim.
Buyer Policy: Covers the buyer for non-disclosure of matters known to the seller which causes a breach of warranty and loss to the buyer. The buyer needs to provide documentary evidence of the issue which was not disclosed in order to claim under the policy.
Key reasons why TLI is essential for SME M&A transactions:
- Financial protection against the most common types of M&A liability claims such as: breach of financial statements, tax warranties, compliance with laws, material contracts.
- Preserves the deal structure – in some deals, especially those involving private equity, or complicated structures, negotiation over indemnities and escrows can become a point of contention. TLI can serve as a bridge, helping to avoid complex legal disputes, which might otherwise kill the deal.
- Includes Defence Costs cover, protecting against spurious claims.
- D&O/Management Liability Insurance does not provide adequate protection for potential M&A liabilities due to the Breach of Contract (or Contractual Liability) exclusion.
How easy is it to put TLI in place?
Very easy! Unlike traditional Warranty and Indemnity insurance policies (W&I) which can be time-consuming and costly, TLI SME products do not have any formal due diligence requirements or require data room access. To receive an indication of terms, all that is required is a description of the business and the EV. If the terms are of interest, the proposer then completes a short proposal form and provides transaction documents.
Premiums start from as little as £2,500 and cover can be put in place within 24 hours of receiving the completed proposal form.
Contact us today to find out more:
Telephone: 07955 270487