Title to Shares Insurance: Everything You Need to Know
July 24, 2023
Acquirecover's SME M&A policy is much different than other insurance policies, as are the claims procedures and how the carrier handles them. The covered peril is based on a breach of the seller's representations, causing a financial loss and the subsequent fallout requiring the seller to provide a warranty to compensate for the loss. In such circumstances, if the buyer sues the seller for such a breach, it can trigger a claim.
A management team based in Silicon Valley recently sold their technology start-up for $10M to a larger company interested in branching into wearable tech. Twelve months after the acquisition, the management team - who then moved on to a new project - was notified of significant patent litigation regarding the proprietary software involved with the wearable technology. As a result, the management team opened a claim with Acquirecover underwriters.
The management team made clear and comprehensive representations regarding intellectual property. These included representations that there had been no notifications regarding patent infringement claims. However, unknown to the management team, the legal department had received two emails from a company based in Japan eighteen months before the acquisition. These emails had not been identified as legitimate and were promptly discarded without the management team's notification. After the purchase, the business buyer received further and more comprehensive contact from the Japanese company, resulting in patent litigation. The Japanese company's litigation was unsuccessful, but the buyer incurred over $200k in defence costs. Since the management team was unaware of the notices, the insurer accepted the claim and paid the loss.
Acquirecover has an aggregate deductible as opposed to per-claim. There is generally a $20k deductible for costs and expenses and a "nil" deductible for everything else. The nil deductible assumes that the "basket" or "threshold" (essentially a threshold within the SPA that which buyer claims need to exceed to bring a claim against the seller) is at least 0.5% of the Enterprise Value. If this is the case, there is a nil deductible from the sellers' perspective. On the other hand, if the basket is less than 0.5%, then the policy will respond in excess of 0.5%. Because of the aggregate threshold and years-long effective policy period, it is essential to track how much has been eroded by prior claims to carry it forward to future claims.
Luckily, the management team purchased M&A transaction liability at the total enterprise value, so the claim paid the entire sum of defence costs. Without the M&A policy, the management team would not have access to an award-winning in-house claims team and would have spent considerable time and money defending the claim against their buyer.
The M&A insurance policy allowed the management team to recover from a moment of crisis without having to pay out a significant portion of their sale proceeds to litigation. Similarly, by purchasing M&A insurance, SME sellers can now exit their business and move on to their next venture with complete peace of mind.
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