Merger and acquisition (M&A) deals can be complicated. Extensive research and preparation must be completed prior to the closing of the deal to ensure there are no hidden liabilities or gaps in insurance coverage.
When preparing for an M&A, it is crucial to understand how the buyer’s and seller’s insurance programs will respond to a change in control. In order to avoid saddling your combined company with uninsured liabilities, you must be knowledgeable about your insurance policies and how each might be modified in a merger and acquisition transaction. Consider the following before completing an M&A deal.
To understand where your risks lie, it’s helpful to understand the expectations that are placed on directors and officers. Directors and officers typically owe their organizations the following three fiduciary responsibilities:
The duty of diligence requires that you discharge your duties in good faith, in the best interests of the organization, and with the care of an ordinarily prudent person. The duty of loyalty requires that you maintain an undivided loyalty to the organization that is not clouded by any conflicts of interest. The duty of obedience requires that you ensure that the organization’s activities are conducted within the boundaries of the law. The failure to reasonably perform any one of these duties can lead to a lawsuit.
As you might imagine, an M&A presents numerous opportunities for each of these duties to be tested.
In an earlier article, “D&O insurance: What you don’t know can hurt you,” coverage under D&O can be quite broad, ranging from actual to even perceived wrongful acts. To learn more about these responsibilities and how they relate to D&O insurance, read our article. However, such policies typically exclude coverage for contract breaches resulting, say, from the failure of a director or officer to follow through or comply with a term in the purchase agreement.
Once the dust has settled from an M&A (and sometimes while it’s still settling) a party can accuse the other of somehow breaching the various agreements that form the foundation of the M&A. Such claims can be quite costly not only in the damages they assert, but in the attorneys’ fees necessary to defend them. To compound matters, when such claims occur, many businesses are dismayed to learn that they have no protections through their General Liability policies.
Fortunately, there is a remedy. Representations and warranties insurance can protect against unknown and unintentional breaches of the various documents and agreements that make up the M&A. Not only does that eliminate a potentially big-dollar risk, but it can reduce or eliminate the need for reserves or escrow payments for unknown or unfunded liabilities, which, in turn, can speed up the timeframe for the seller to receive full payment.
Most employers’ work comp premiums are driven by a variety of factors, including industry averages (e.g., construction jobs present a much higher risk of injury than do the jobs of blogging attorneys), employer payroll, employee job classifications, and claims history. In turn, your claims history impacts your experience modification rate, or work comp mod.
Although this is a bit of a simplification, the greater number of claims you have, the higher your work comp mod is likely to be. The reason that’s important is because the mod can act as multiplier for your premiums. So, if the number is above 1.00, you will pay more in premiums than you should, and if your mod is below 1.00, then you will pay less.
Suppose the company you just merged with has a mod of 1.67, and safety practices that are a shambles at best, and nonexistent at worst. In most cases, their experience mod will impact your premiums for the next three years or so.
This makes sense if you think about it. The basic concept behind the mod is that it will drive better employer safety practices, which in turn should lead to fewer (and less costly) injuries. Employers shouldn’t be able to shed themselves of a bad mod simply by dissolving the corporation on a Monday afternoon, reincorporating as a new entity, and then carrying on the same business on Tuesday with a new name. The same principle applies to a sale where the basic business of the selling entity will continue with the same employees, but under new ownership.
Work comp experience mod rates are one of the many things that employers often overlook when planning for an M&A. But if you consider the mod and choose to go ahead with the acquisition, you should continue your due diligence by getting at the root causes of the seller’s bad mod.
The type of sale can dramatically change the liability landscape. For instance, in a stock sale, the purchasing entity is acquiring the assets and liabilities of the selling entity, which means that claims arising after the sale should be covered by the purchaser’s general liability policy (although the purchaser should coordinate with its insurer to confirm that the full scope of potential liabilities of the selling entity will be covered).
However, in an asset sale, the purchaser is only acquiring the assets of the selling entity, and specifically isn’t taking on the liabilities. When the seller is only selling a portion of its business, the seller’s liability insurance should continue to provide coverage. However, when the seller ceases operations after the asset sale, its liability policies cease as of the close date as well, which means that there won’t be coverage for claims that arise after the sale. As a result, the parties should consider obtaining a Discontinued/Completed Operations policy to provide coverage for bodily injury and property damage liability which occurs after the sale of the business and arises from products or operations that were sold or completed before the sale of the business.
Insurance is usually not a deal breaker during a merger or acquisition, but it can be a subject of deep regret after the fact if you learn you don’t have coverage in place to cover a claim arising in connection with the M&A. Making sure the insurance programs between the selling and purchasing entities align can be an important step in the process.
For example, we helped Nelson Pipeline prepare for an acquisition by creating a mirror image of the target company’s captive insurance program (read about the award-winning M&A case here). The target company had the benefit of strong financials and therefore qualified for a captive insurance program that boasted relatively low costs and superior coverage. However, the combined organization would not have met the requirements to participate in the captive program.
The “mirror image” insurance program contained similar costs and coverage to the target company. After implementing the new program, the combined organization would qualify for the captive insurance solution.
For more information about protecting your organization before, during and after an M&A deal, please contact us.
James provides guidance to employers on a variety of topics with a focus on employment, risk management and liability issues. In addition to working directly with employers, he regularly conducts in-depth training through webinars, at client sites, and through the University of Minnesota’s Continuin
James provides guidance to employers on a variety of topics with a focus on employment, risk management and liability issues. In addition to working directly with employers, he regularly conducts in-depth training through webinars, at client sites, and through the University of Minnesota’s Continuing Ed program. He previously was a plaintiff’s attorney and brings that perspective into his advice to employers. James received his law degree from the University of Minnesota and his BA from Washington University in St. Louis.
In the ongoing battle to contain costs, employers are always looking for tools, old and new, to help keep their healthcare spending in check. One approach is healthcare consumerism — but too often consumerism is discussed as just another plan design option and many employers are hesitant to implement this cost-saving strategy.
At a recent employment conference, I asked 300 executives and human resources professionals to identify:
Rather than cite a work team, the majority of attendees identified sports teams or public service organizations from their youth as being the most effective team.
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