M&A transactions without surprises: How to protect directors and officers against inaccuracies or failure to comply with their Representations and Warranties (R&W)

When company officers issue R&W in the context of an M&A transaction, the question arises as to whether the D&O policy would cover them in the event of inaccuracies or violations. D&O and W&I insurance cover different situations, so supplementing them offers a comprehensive layer of protection that allows eliminating or reducing the liability of the seller’s directors and officers in the framework of a purchase transaction.

D&O insurance is designed to protect officers and directors against personal financial liability in the event of claims due to poor management, negligence or omissions in management. Similarly, W&I insurance covers the buyer’s financial losses resulting from inaccuracies or violations of the R&W given by the seller and, where applicable, by its officers and directors in the framework of an M&A operation.

The officers and directors of the selling party can be doubly exposed: they may be liable for compensating the buyer or third parties in the event of claims related to their conduct and decisions in the performance of their duties, and they may also have to compensate the buyer, depending on the R&W issued in the purchase contract. To illustrate the above, if the seller’s officers provide R&W about the accuracy of the company’s financial information and, after the acquisition, the buyer discovers significant accounting irregularities that were not revealed during the Due Diligence process, both policies (D&O and W&I) could be triggered, performing different roles. If the purchasing party alleges negligence in the presentation of the financial information and sues the directors, the D&O policy could cover their legal defence costs and, in some cases, the compensation they have to pay, and if the buyer suffers financial losses due to the inaccuracy of those R&W related to the financial information, the W&I policy could cover the economic losses incurred by the buyer.

In some cases, the buyer could activate both policies to obtain compensation for losses suffered due to negligence in the presentation of financial information, depending on the specific terms of the policies and how they supplement one another and apply to the specific situation. D&O insurance does not usually specifically exclude inaccuracies or violations of the R&W provided by officers, but it is also not intended to cover them, so it is essential to analyse the terms and conditions of both policies.

In addition, within the framework of the purchase, it is important to take into account the change of control clause in D&O policies. When a third party acquires more than 50% of the company’s share capital, this clause is activated and the coverage for acts committed by directors and officers ceases. The above may lead to a major problem because the liability for the actions taken in the past, before the transaction occurred, does not lapse; rather, it expires four years from the day on which it could have been exercised. This is why it is important to take out a run-off period for the D&O policy in force to protect the seller’s directors in this situation.

In short, the overlap between D&O and W&I insurance offers coverage that allows the risks associated with an M&A transaction to be mitigated. Understanding the specific responsibilities of the seller and its officers is essential to designing insurance strategies that are consistent with their commercial and financial objectives.

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