Episode 6: Transaction documents – will the warranties list be affected by Covid-19? What about W&I Insurances?
Warranties are heavily negotiated in almost any M&A deal, given that these are supposed to allocate the risks for the past between sellers and purchasers. Hence, considering that the Covid-19 economic effects will occur in the future, one could say that the pandemic should not affect in any way the list of warranties. This is only half true.
Scope of warranties. In an attempt to maximize the target’s valuation, sellers benefiting from their knowledge of the business and from the (maybe already proved) ability of the target to navigate through such difficult times might decide to address purchasers’ concerns by providing certain warranties in relation to the measures already implemented by the target to mitigate any impact of the Covid-19 outbreak.
Limitations. From a financial perspective, in a market dominated by increasing risks, the natural tendency would be to assist to increases in the financial limitations (i.e., caps) applicable to sellers’ liability under the transaction documentation. Also, we would not exclude the possibility of seeing the potential Covid-19 warranties being treated differently from the more usual set of warranties, including with regard to applicable time limitations which might, for example, be more reduced (one should also remember that for purely Romanian deals the time limitations are suspended during the entire state of emergency period).
W&I Insurance. We expect that the M&A insurance market will remain open for business and that the usage of the W&I Insurance may even increase in this new context. However, the W&I Insurance should not be seen as a way to shift the risks regarding the Covid-19 outbreak to a third party, as all insurers will push for a general Covid-19 exclusion and will continue to refuse to insure any forward-looking warranties. Furthermore, any new warranties included to address the Covid-19 outbreak, even if not forward-looking, will be insured only subject to a robust due diligence having been conducted on such topic. One would also expect that some of the usual warranties which in the past were easily insurable, if it would be reasonable to expect for such to be directly impacted by the pandemic (such as the warranties regarding general compliance with laws, employees’ related health and safety measures or changes since the accounts date), to become more difficult to be accepted by the insurers, save where the due diligence processes covered such topics to the insurer’s satisfaction. In terms of pricing and financial coverage, the market will most probably be characterised by an increase in the W&I Insurance premiums, driven, on the one hand, by the insureds’ requests for a higher financial coverage to minimize the risks associated with the M&A deal and, on the other hand, by a potential increase in claims which may trigger insurers’ payment obligations.
With this episode we are closing the series of articles in which we have tried to point out how we would expect the architecture of a standard M&A transaction to be (re)shaped these days. We hope you found our articles interesting. Stay tuned to RTPR Emergency Journal for other captivating articles regarding how Covid-19 may impact the businesses in these challenging times.
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