Real Estate mergers and acquisitions are rarely uneventful. To avoid ending up on the wrong side of a settlement while merging with another entity, acquiring a company or partnering with a vendor or supplier, you’ll want to reduce as many risks as possible before cementing the relationship.
Having the right insurance coverage during the process can not only relieve some of the stress but ensure the right protection for your stakeholders and leadership. However, whether you’re the seller or the buyer, there are specific risks to prioritize.
If You’re the Seller
When selling a real estate business, it’s easy to get swept away by the focus of “getting the deal done.” However, litigation during the selling process is not uncommon and it’s crucial to understand where your liability lies.
With every M&A deal, the seller makes contractional guarantees known as representations and warranties that establish the conditions under which a deal can proceed. A breach of representations and warranties occurs when the buyer claims that the seller’s guarantees are inaccurate, arguing that they are overpaying for the company. If this misrepresentation during negotiations, or within the share purchase agreement, takes place unintentionally, Representations & Warranties (R&W) insurance covers the litigation and subsequent fees.
Traditionally, business owners use escrow/ holdbacks to protect themselves against misrepresentations from sellers during negotiations. These amounts held in trust can be 10% of the purchase price or more. With R&W coverage, the seller can receive the entire amount of the deal up front, and the insurance protects the buyer’s money for everyone.
Directors & Officers (D&O) coverage is one of the most important coverages to secure during such a critical juncture in your organization’s history as it covers your leadership from being personally sued for any unintentional breaches during the transition process. You may already have D&O coverage, but you’ll need a new policy when the company transitions.
If your real estate business is transitioning to a public entity, examine the D&O contract carefully — private D&O usually includes a number of extra coverages that often disappear with basic public D&O. However, it may be worth negotiating to include some of those extra coverages, especially when related to employee practices liability (EPLI) coverage. While D&O insurance renews annually, you’ll want to end your current contract on the last date of your private or independent company and start a new contract on the first date of your public or merged company to delineate the different capacities of your board members
If You’re the Buyer
During negotiations, liability stemming from pending litigation, tax obligations, enviromental clean up obligations or disputes over legal title are often a major point of negotiations for real estate firms, as it can affect the indemnities, purchase price or amount of the escrow. Contingent risk insurance helps remove this point of contention. Policies are tailor-made to identify and protect risks associated with known and ongoing risks of all types.
It’s also worth considering whether you want control over the company you are buying’s old insurance policies. Although an administrative issue, control over the old policies ensures direct access to historical coverage in case of an issue. Tracking down old insurance documents or former employees isn’t always possible, you should coordinate from the beginning to ensure you have control (or copies) of all the policies.
Matthew Studley is Vice President of Financial Services for Hub International, focusing on executive liability insurance and risk management consulting. Hub International is a leading global insurance brokerage that provides property and casualty, life and health, employee benefits, investment and risk management products and services through offices located in the United States, Canada and Latin America.
Matthew’s focus is on executive liability insurance and risk management consulting for the financial services industry. His clients include some of Canada’s largest publicly traded and privately owned financial institutions with operations in Canada, the U.S., Europe and Offshore. He provides advice on a range of risk management and corporate governance issues, including Directors’ and Officers’ Liability, Professional Liability, Mergers & Acquisitions, Cyber & Privacy Liability, and Employment Practices Liability.
Matthew specializes in asset management companies, offshore banks, private equity firms, activist investment funds, investment banking firms, litigation funding vehicles, investment dealers, mortgage investment corporations, REITs, independent review committees and pension plans.
Prior to venturing into the insurance industry, Matthew spent several years working for one of Canada’s largest asset management firms, first in retail portfolio management, and then as an analyst serving both retail and institutional investment management clients. Matthew holds a bachelor’s degree in finance, and is a CFA charterholder.