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Public M&A transactions continue to present attractive opportunities for strategic and financial investors seeking access to established businesses, strategic assets and public market valuations. However, unlike private acquisitions, buyers may face a contractual protection gap where unknown issues affecting the target emerge after signing or completion.
While this has traditionally been accepted as a feature of public M&A, Warranty & Indemnity (W&I) insurance is increasingly being considered by buyers seeking a level of contractual certainty more commonly associated with private transactions. This article examines the unique transaction risk challenges in public M&A and how W&I insurance can help buyers secure greater contractual protection and execute transactions with increased confidence.
Why public M&A requires a different approach
The allocation of transaction risk in public M&A differs fundamentally from private acquisitions. In a typical private M&A transaction, buyers benefit from a comprehensive warranty package supported by detailed disclosure and clear contractual recourse against the seller. By contrast, the nature of listed companies, dispersed shareholder bases and regulatory requirements means that obtaining the same level of contractual protection in public M&A is rarely straightforward.
These structural differences mean that buyers often make investment decisions with a different balance of information, contractual protection and post-completion recourse than they would expect in a comparable private acquisition. While transaction structures vary across jurisdictions, several common challenges are consistently encountered in public M&A, including:
Reliance on public disclosures
Listed companies are subject to extensive disclosure obligations and operate within a well-regulated environment. As a result, buyers are often expected to derive sufficient comfort from publicly available information and regulatory oversight, rather than expect the comprehensive warranty package and disclosure process typically seen in private M&A transactions. However, while public disclosures provide important information, they are not always a substitute for contractual protection if unknown issues subsequently emerge.
Limited warranty providers
Unlike private M&A transactions, public M&A often involves a dispersed shareholder base, with many shareholders having no direct contractual relationship with the buyer. As a result, it may be difficult to identify a party that is both willing and able to provide a comprehensive warranty package. Even where warranties are given, liability is often limited to each selling shareholder's proportion of the sale, making it difficult for buyers to obtain meaningful contractual recourse. Equally, requiring the target company or its management to provide warranties is often neither practical nor commercially acceptable.
Disclosure constraints
Public M&A transactions are also subject to practical constraints on information sharing. Confidentiality obligations, regulatory requirements and market sensitivity may limit the extent of diligence and disclosure that can be provided before a transaction completes. As a result, sellers may be unwilling or unable to support the comprehensive disclosure exercise that typically underpins a comprehensive warranty package in private M&A transactions.
Taken together, these characteristics create a contractual protection gap between public and private M&A transactions. While these differences have traditionally been accepted as a feature of public markets, they have also prompted increasing interest in alternative approaches to managing transaction risk.
Bridging the contractual protection gap
As buyers increasingly seek greater contractual certainty and downside protection, W&I insurance is being considered alongside traditional transaction structuring rather than as a niche or exceptional solution. Rather than altering the legal mechanics of a public transaction, W&I insurance may complement existing transaction structures by helping bridge the contractual protection gap and assisting buyers in obtaining a level of contractual protection more commonly associated with private acquisitions.
The deployment of W&I insurance will depend on the structure of the public M&A transaction. Whether a transaction is structured as a minority investment, mandatory or voluntary general offer, or scheme of arrangement, the commercial objective remains the same: providing buyers with meaningful contractual protection despite the inherent limitations of public acquisitions.
Even where contractual warranties are provided on a limited or nil-recourse basis, W&I insurance may, depending on the transaction structure and underwriting considerations, provide buyers with protection for the full value of their investment. In public M&A transactions, sell-side warrantors will typically provide warranties on a nil-recourse basis and limit any warranty package to their respective sale interests. Despite these contractual limitations, W&I insurance may be structured to provide buyers with coverage for the full value of their investment stake. This may allow buyers to negotiate commercial terms without those limitations necessarily dictating the level of post-completion protection available.
The objective of W&I insurance isn't to replicate private M&A - it is to give buyers greater contractual certainty despite the structural differences inherent in public transactions.
Structuring W&I for public M&A
Implementing W&I insurance in public M&A transactions involves careful consideration of both the transaction structure and the underwriting process. While many of the principles applicable to private M&A remain relevant, public transactions present several additional considerations that are often addressed early in the deal process.
Flexible policy structures
In a general offer, the buyer's ultimate investment stake may not be known until the offer period has closed. While acceptance levels can often be estimated with reasonable accuracy, the W&I policy should be structured with sufficient flexibility to accommodate different acquisition outcomes. This may assist buyers in securing greater certainty of coverage despite uncertainty over the final level of shareholder acceptances.
Disclosure and due diligence
As with private M&A transactions, the scope of W&I coverage will depend on the quality and extent of disclosure and due diligence supporting the warranties. In public M&A, underwriters recognise that buyers may need to rely more heavily on publicly available information and that certain information cannot be disclosed because of regulatory or commercial constraints. Understanding these expectations early may help avoid unnecessary coverage limitations later in the transaction process. Early engagement with brokers and underwriters can therefore be valuable in aligning diligence expectations with the intended scope of coverage.
Synthetic W&I coverage
In some public M&A transactions, no suitable warrantor can be identified or no warranties are provided. Where buyers nevertheless seek protection comparable to a private acquisition, synthetic W&I coverage may be considered. This involves warranties being drafted directly into the insurance policy for the purposes of coverage, rather than being given by any transaction party or included in the transaction documents. Early consideration is often important where synthetic solutions may be required.
Conclusion
Public M&A transactions present unique challenges when it comes to allocating transaction risk. While buyers have traditionally accepted more limited contractual protection than in private acquisitions, W&I insurance is increasingly being used by parties seeking to bridge the contractual protection gap without altering the underlying transaction structure.
As public M&A activity continues to evolve across Asia, W&I insurance is increasingly being considered an integral part of transaction strategy rather than simply a post-negotiation risk transfer solution. Buyers are increasingly considering W&I insurance earlier in the deal process as part of their broader transaction planning, to be better positioned to enhance deal certainty, bridge the contractual protection gap and secure more meaningful post-completion protection.
Get in touch
We work with private equity sponsors, corporates and investors across Asia to structure tailored Warranty & Indemnity insurance solutions for both public and private M&A transactions. If you would like to discuss how W&I insurance could support your next public M&A transaction, please get in touch with our team.
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