A key enabler – exploring the potential of W&I in Southeast Asia

"It provides buyers with more certainty as to recourse and provides sellers more certainty as to price"

A key enabler – exploring the potential of W&I in Southeast Asia

Insurance News

By Kenneth Araullo

A rarely employed tool in the past, mergers and acquisitions (M&A) insurance, specifically warranty and indemnity (W&I) insurance, has assumed a significant role in corporate M&A transactions in Southeast Asia, contributing to the mitigation of sell-side liabilities and facilitating deals.

In its latest Spotlight Series, Stephenson Harwood (Singapore) Alliance head of M&A Tom Platts said that the use of W&I has never been as prevalent as it is today.

“It provides buyers with more certainty as to recourse and provides sellers more certainty as to price,” Platts said. “Given its merits, I expect it will continue to become a staple of M&A transactions.”

While the utilisation of W&I insurance in the Asia-Pacific region was primarily limited to jurisdictions like Australia and New Zealand, it has now gained more widespread acceptance throughout the broader region. Particularly in Southeast Asia, businesses now increasingly expect their advisors, including corporate finance professionals and prominent law firms, to provide guidance on W&I insurance policies.

What is W&I insurance?

W&I insurance typically provides coverage for losses resulting from the seller's violation of warranties detailed in the underlying acquisition agreement or a claim related to a tax covenant. The arrangement and negotiation of W&I insurance are likely to engage various parties, including insurers, solicitors, and tax advisors.

Comprehending the functioning of W&I insurance and its capacity to serve as a transaction facilitator, offering a level of assurance to both the seller and the buyer, will empower deal advisors to provide more informed guidance to their clients should the parties opt to employ W&I insurance.

“While it may not be appropriate for every M&A deal, advisers and clients should be aware that underwriting a deal using W&I insurance is a tool available to them. The insurance can work around the type of deal (whether it is a 100% or partial acquisition) and can work to the advantage of both parties, generally smoothing the post-deal relationship,” said Chris Madden, corporate associate at Stephenson Harwood (Singapore) Alliance.

W&I insurance provides protection to the policyholder in the event of a loss resulting from a breach of warranty or a claim under a tax indemnity. Although most W&I policies are held by the buyer, this benefits the seller as it allows it to make a “clean exit” – especially if it caps its liability in the SPA – without the worry of a future claim from the buyer because of any mistaken warranty breach. It also benefits the buyer as it can claim directly against an “A-rated” insurance company without risking damaging the relationship with the seller, which may be particularly important if the seller has remained in the target group.

“As W&I insurance gains traction in the region, it is crucial for advisers to demystify its intricacies and highlight its benefits to clients. By providing clear and concise explanations, advisers can help bridge the knowledge gap and instil confidence in the use of W&I insurance – this will be instrumental in facilitating smoother transactions and ensuring that all parties involved can fully leverage the advantages this innovative solution offers,” said Sheetal Sandhu, Stephenson Harwood (Singapore) Alliance corporate partner.

W&I trends in Southeast Asia

Some of the recent W&I trends in Southeast Asia include the following:

  • Increase in the use of W&I insurance in minority investments – Many investors associate W&I insurance only with 100% acquisitions, but it is finding use in insuring minority stake transactions as well. New minority investors may be reluctant to claim for a mistaken breach of warranty from fellow shareholders, as it could harm the business relationship.
  • Increase in the use of synthetic warranties in distressed deals – Distressed M&A transactions often have accelerated timelines and limited due diligence opportunities. Sellers in distressed deals may provide only limited warranties, increasing risk for buyers and potentially resulting in lower sale prices.
  • Tax considerations – Tax risk coverage through W&I insurance remains a key deal consideration. Claims related to tax warranties in APAC are high, accounting for approximately 25% of all breach types. Tax indemnities and warranties are typically excluded from W&I insurance policy coverage unless sufficient tax due diligence has been performed or subject to coverage exceptions.

“Despite economic headwinds globally, as Singapore and Southeast Asia continue to perform well economically, we expect deal volume and consequently the use of W&I insurance as a product to increase. Consequently, there has never been a better time for corporate advisors to garner a sound understanding of the merits of W&I insurance,” Platts said.

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