M&A, Due Diligence & Post-Merger Integration

Risk & Insurance is often brought into M&A processes late. Its contribution can begin with deal strategy, preparation and counterparty search, and continue through due diligence.

The review of existing insurance cover sits alongside legal, financial, tax, commercial, operational and environmental due diligence. It can identify exposures and issues that may affect valuation, the allocation of liabilities or the ability to complete the deal.

Among transactional insurance solutions, Warranty & Indemnity (W&I), also known as Representations & Warranties (R&W), may cover losses arising from unknown breaches of the seller’s representations and warranties, subject to the policy terms and limits. A buyer-side structure may complement the negotiated liability cap and reduce exposure to the seller’s solvency or liquidity. It may also reduce reliance on escrow or other security, such as letters of credit. Any cover for seller fraud, exclusions and subrogation rights depend on the policy structure, wording and applicable law and should be reviewed carefully. In some processes, the seller initiates a W&I solution that is later transferred for the buyer’s benefit through a structure known as a “flip”.

Early involvement matters because W&I is tailored to the Representations & Warranties in the sale and purchase agreement and the due diligence findings. Insurance does not replace due diligence: cover, exclusions and conditions should be aligned with the deal. Other solutions may include Contingent Liability cover for specific contingent liabilities that fall outside the scope of W&I cover, and Tax Liability insurance for identified tax risks. A change of control also calls for consideration of D&O Run-off cover for outgoing directors and officers.

Before signing, the purchase agreement should also address the governance of existing and future insurance cover to support continuity and plan for integration. Responsibilities between signing and closing, and after closing, need to be clear. A Transition Service Agreement (TSA) can create further dependencies, gaps or ambiguity around existing policies. After closing, Risk & Insurance programmes, processes and accountabilities should be integrated in line with the organisation’s new footprint.

For private equity firms, dedicated programmes or facilities for management liabilities and centralised risk governance across portfolio companies also deserve attention. Inadequate cover at portfolio-company level can expose the fund to losses and undermine investment value.