a major enabler of Insurance business

a major enabler of Insurance business

During my professional carrier, I have been worked with a series of projects that demand an extensive knowledge about M&A (Mergers and Acquisitions).

For sure, this kind of project requires a thorough work, mainly when you are working to the Buyer that will assume the liability inheritance in several respects, mainly what I call as "TLE "(Tax, Labor, Environmental).

A perfect work of Due diligence and the inclusion of warranties in the SPA (Sale and Purchase Agreement) - e.g. Escrow Provisions, sometimes are not enough to avoid future demands, i.e. what began as great business, a few days after the SPA signature, can be transformed in a nightmare, for the buyer as well as to the seller.

Historically, indemnification in M&A transactions are always very difficult, slow, having a huge cost, even where the parties agreed upon the purchase price and established all the warranties (usually through escrow accounts)

Although such arrangements have provided some level of security, they have always had limitations:

1. Sellers assuming the risk that they will not be able to receive the remainder of the purchase price or will only receive funds after a significant delay;
2. Buyers assuming the risk that escrowed funds can be insufficient to cover all indemnity claims and that funds would be released prior to discovery of a breach;

Thus, with the goal to have a bigger secure in all the M&A operations developed by our legal department, we recomend, in complementation of the Escrow Account, a M&A insurance policy, that in my point of view, offer a lot of advantages to warranty of M&A operations, with a sensible reduction of the Escrow provision that, commercially, can represent an advantage to the seller in the moment to choose the best sell proposal, as well as increase the secure of the operation for the Buyer after the SPA signature.

The insurance is relatively expensive, the policies should range between 3% and 7% of the insured value and the deductibles between 1% and 3% of the transaction value,

However, the policies can not be canceled, ensuring that coverage is maintained during the period of potential liability.

Compared to the escrow accounts (guarantee scheme most used in Brazil currently), the M&A Insurance does not leave part of the capital of the seller blocked for a long period of time, does not need agreement of both parties to release the amounts in the event of unforeseen . The M & A insurance transfers the responsibilities of the seller and buyer for the insurer.

As already happens in the USA and Europe, The M&A insurance can become a major enabler of business in the Merger and Acquisitions transactions in Brazil.


Written by
Athayde Delphino Jr