What you need to know about W&I insurance for Schemes of Arrangements
How is the W&I insurance structured?
In a traditional SOA transaction, bidders do not typically have the benefit of receiving any operational warranties or indemnities as to the target business being acquired.
A warrantor must be willing to provide the warranties and indemnities under the Scheme Implementation Agreement (SIA)
The W&I insurance requires a warrantor who negotiates the warranties and discloses against them. Due to the disparate shareholding base of a typical public company, the target company tends to act as warrantor.
The target company can get comfort to do so by structuring the warranties and indemnities as a “nil recourse regime”, absent fraud, using a buyer-side W&I insurance policy. This is how a seller would typically structure a private insured transaction. In the event of a breach of warranty, recourse would be to the insurer (not the target) and to effect this, appropriate W&I insurance clauses can be added to the SIA.
The warranties and indemnities will need to be subject to disclosure and customary qualifications and limitations
If these disclosures, qualifications and limitations are not included in the SIA, then these will need to be a feature of the W&I insurance policy.
The buyer is the insured
The buyer is the “Insured” under the W&I insurance policy and will be able to structure the W&I insurance program sought in terms of the limit of liability and other W&I insurance metrics to its requirements.
The W&I insurer would still require subrogation rights against the warrantor (i.e. the target) in the event of warrantor fraud.
Effectively, given the buyer is acquiring the target, the buyer does not have the true benefit for loss that is the result of the target’s fraud. Aon has in the past mitigated this as much as possible by arranging insurance which tightly defines the meaning of ‘fraud’.
What coverage is available under the W&I insurance policy?
As is the case on a typical insured transaction the general business and operational warranties, a general indemnity for breach of such warranties and a tax indemnity would customarily be insurable. This typical cover would include ‘key’ warranty heads such as compliance with laws, disclosure and accuracy of information relevant to the transaction/disclosure materials, compliance with material contracts, accounts warranties and employee and contractor warranties for example.
The extent of warranties that are insurable will be a function of the quality of the disclosure and due diligence conducted by the parties. The W&I insurance policy provides flexibility in terms of when coverage is incepted. In our experience, this would typically be at the date the SIA is signed (and the warranties are given as of that date). We also typically insure the warranties as brought down at implementation date/unconditional date or second court date as applicable (i.e. akin to the bring down of completion warranties).
What policy metrics are available and what does the insurance cost?
The W&I insurance policy would contain the usual W&I insurance metric requirements including limit of liability or insured amount, a policy period, a retention and a de minimis. These would not necessarily need to be reflected in the SIA and could just be captured under the policy document. The typical W&I insurance metrics of 1% of enterprise value retention, 0.1% of enterprise value de minimis (lower options are also available subject to underwriting) and customary policy periods would also apply (typically 7 years for tax matters and 3 years for operational business matters). Premiums typically range from 1% to 2% of the limit of liability purchased.
What are the process and information requirements?
The process to put in place a buyer-side W&I insurance policy in an SOA transaction does not materially vary to the typical W&I insurance process on private transactions – in terms of information requirements or guideline timeframes. The warranties and indemnities given by the target under the SIA would still need to be negotiated between the parties and also be subject to a customary disclosure and qualification regime similar to private deals. If these are not captured in the SIA document, then these would need to be a feature of the policy. The buyer will be expected to perform customary buyer due diligence across each of the heads of warranties relating to tax, legal and financial matters. The process can be completed within 2 weeks but we generally advise a longer lead time.
When is W&I insurance not suitable for a public transaction?
W&I insurance cannot be utilised in the context of a public deal where no meaningful warranties will be provided as a result of such takeover. The transaction must be in the context of a ‘friendly takeover’ in order for it to be insurable.
Case studies on public to private transactions
Aon has worked on numerous high profile SOA transactions where we have successfully arranged a W&I insurance solution in the name of the buyer to facilitate the transaction.
Case Study 1
|Transaction||Circa $400 million acquisition of an ASX-listed retail brand by way of SOA.|
|The need for W&I Insurance||The buyer had a minority pre-existing stake in the listed target and was concerned to ensure that reputational and investment risk was protected via insurance capital should any unknown risks transpire after implementation.|
|Solution||Buyer-side W&I insurance insuring the buyer, providing cover for a comprehensive suite of ‘private treaty style’ warranties and tax indemnity.|
|Structure||$40 million insurance limit, 1% retention tipping to nil, 3-year operational warranty period and 7 years for title and tax claims.|
|Benefits||Historic risk was insured through detailed warranties rather than solely relying on disclosure. Allowed the buyer to shift focus to the turnaround of the target with a view to exit strategy in the future.|
Case Study 2
|Transaction||Circa $2 billion acquisition of an ASX-listed company by way of SOA.|
|The need for W&I Insurance||The target was a multi-national business with operations in the Middle East and US. W&I insurance was pursued to enhance the buyer’s investment committee process and to protect themselves and their investors against any post-completion liabilities arising out of a breach of the warranties.|
|Solution||Buyer-side W&I insurance insuring the consortium.|
|Structure||$200 million insurance limit, 0.75% of enterprise value retention, 3 year operational warranty period and 7 years for title and tax claims.|
|Benefits||The W&I insurance assisted the negotiations with the target company and provided the buyer with additional financial security for the transaction in the event of a breach of warranty, particularly with the foreign operations and the complex levels of regulatory requirements in the various jurisdictions.|