If you’re in the life sciences industry, you’re well aware that mergers and acquisitions happen daily. In fact, in 2016 the life sciences merger and acquisitions transaction value approached $200BB with 387 separate transactions. And within the first quarter of 2017, 71 transactions have already been reported.
There are a variety of reasons to either acquire or be acquired. For example, you may want to be acquired because of a need to access complementary products, markets, working human capital, or simply because it’s your best return on investment. If acquiring, you’re likely looking to gain critical technology, access to new markets, or expand a product line.
Either way, it’s important to limit exposures throughout the process. Whether on the buy or sell side, there are ways to maximize your net cash value and limit the overall post-close risk of your transaction.
When a merger or acquisition event occurs, your future liabilities are strongly dependent on the type of acquisition being made, including merger, investment, or asset purchases. Though asset-only purchases are popular when trying to avoid successor liabilities, the structure of a company and tax status will often drive the type of transaction. But we’ve seen time and time again where that’s not always the case when a product is involved and strict liability comes into play.
How to Approach Your Next Deal With Confidence
One way to approach your next deal is to utilize Representations and Warranties (R&W) insurance. It covers liabilities arising out of a breach of one or more of the R&W in merger and acquisition transactions. Whether on the buy or sell side, who wouldn’t like to take advantage of a risk-averse approach that leaves both parties better off?
In the insurance industry, we’re seeing R&W policies being used increasingly more during auction scenarios. For example, this occurs when corporations and private equity firms are competing or one is looking to acquire a risk-averse seller, such as a family-owned business.
As we go through the main elements and reasons to utilize a R&W policy, keep in mind this is still an insurance product that works for various unknown scenarios (for known exposures you can look to other transaction liability insurance products such as contingent liability policies). Though a transaction has many elements, a R&W policy can help address four major areas of concern:
- Indemnity caps
- Survivability clauses
- Narrow representation wording
In the life sciences industry, we can see escrow amount requirements from 10% to 20% at times, all depending on the type of deal, competitive environment, and of course, the concerns that surround the potential unknown liabilities of a company. A R&W policy allows for a reduction of this escrow account to 1% and can be extremely valuable for both sides of the deal. This allows for less uncertainty during the escrow period, setting up parties on both sides of the deal to be better off. Along with the reduction of escrow, the deal can also benefit by placing this policy in lieu of your standard indemnity cap language. This can minimize post-close risks and maximize net cash flow.
The survivability clause for representations made within the purchase agreement is typically 12 months, but what if you aren’t made aware of an issue for two to three years after close? A R&W policy extends the survivability period to three years after close.
The last major exposure a R&W policy can address is the narrow wording utilized for the representations made. “On this date, by this specific person and this specific instance” is represented too. With a R&W policy, you have a much broader set of representations which to utilize in your coverage form.
Finally, with this policy you can limit and mitigate transactional risks while making your company or offer more attractive at the same time, ultimately having smooth mergers and acquisitions.