n Confirmation of the claims/loss experience. n Confirmation of responsibility for arranging any engineering/inspection insurance.
Issues which will impact the giving of warranties include: n Sustainable investing practice: The real estate sector is of specific interest from an environmental perspective, as it has been well documented that the sector is responsible for 40% of global greenhouse gas emissions, for 55% of the global usage of wood, and for about 75% of electricity consumption in the US alone. Buyers will do due diligence on energy efficiency programmes/carbon trading & omissions obligation.
n Pollution liabilities. n Stamp duty land tax (SDLT) and other tax structuring issues.
n “Right to light” litigation. n Rent review and break clauses practices. n Proof of Title in emerging markets or restrictive covenants and other contingent legal risks. n Joint ventures arrangements.
It is not uncommon for M&A insurance to be considered – motivated by not only financial uncertainty – but also due to the product offering being more “fit for purpose” than it had been previously.
Case study – Lockton facilitates complex property warranties transaction The client wished to purchase a property asset in London that was effectively subject to a “fire sale” – an increasingly common occurrence in the current economic and market climate.
The client buyer – a European entity – wanted to buy this London asset, owned by a LuxCo (the Seller), through a complicated corporate structure whereby the beneficial ownership sat with a General Partner in London. The legal title was with two nominee Companies registered in the UK.
The deal was such that it was necessary for “the Buyer” to acquire all the shares in “the Seller”.
The complexities were heightened as a result of cross border regulatory issues, and the need to deliver tax and accounting efficiencies. To do all of this required eight restructuring steps involving numerous legal documents. The Lockton team was tasked with investigating a feasible solution that would allow the buyer to partially transfer the key risks.
Neo Combarro said “Working closely with the client and with insurers, we were successful in securing a unique solution, whereby insurers stepped into the shoes of the Seller and not only gave key warranties, and in addition gave a number of deal enhancing warranties. We developed a schedule of more than 30 “synthetic warranties” and a separate schedule of “synthetic limitations”. To achieve this involved significant amounts of time working with the Buyer’s deal team, insurers and their respective advisers in undertaking due diligence in both the UK and Luxembourg.”
The importance of the insurance solution was highlighted in two potential deal-breaking instances in the final days and hours preceding closure. The Seller insisted on some remote tax liabilities to be protected, and in the final hours when the deal almost collapsed, a minor but critical amendment to language of one synthetic warranty was negotiated.
Case study – Contingent Liability Insurance Allison Hollern from Lockton Financial Risk was approached by a developer looking to launch a wind energy project in Scotland. He was issued right to build permits, purchased the land, and started the research and planning needed to launch the project. A local conservation group came out after the land purchase, and said the City Council had no authority to issue such permits. They filed a suit against the City trying to stop the development and pull the right to build back. Lockton worked with the developer to place insurance to cover the developer’s costs, should their right to build/right of use get pulled and they needed to in turn litigate. The deal size was about £30m and insurers relied on a positive legal opinion stating the developer had a valid contract and favorable case law with regard to right to build protection. n
Company Profile
Lockton is the largest independent privately owned global insurance broker. With more than 3,825 associates, Lockton delivers seamless services in virtually every country in the world. The Real Estate & Construction division (REAC) of Lockton has an experienced, highly skilled and dedicated team comprising some 68 associates, specialising in the provision of insurance products, services and risk management advice to the global real estate and construction sectors. REAC arranges cover for in excess of £80 billion of global real estate assets for our clients. Working with Lockton’s Financial Risk and Private Equity and Corporate Acquisitions Practice (PECAP™) Lockton provides structured risk solutions for M&A deals including Warranty and Indemnity, Tax Insurance and specific Contingency Insurance.
Risk and Insurance in Private Equity and M&A 2012/13
Author Viewpoint 37
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