Recalibrating Risk In M&A Transactions With W&I Insurance ' A Potential For Growth In Belgium

• Published date: 09 June 2022
• Subject Matter: Corporate/Commercial Law, Insurance, M&A/Private Equity, Insurance Laws and Products
• Law Firm: Astrea
• Author: Mr Steven De Schrijver

2021 was an excellent year for mergers and acquisitions (M&A) in Europe. According to Bloomberg, the value of all pending and completed deals amounted to '1.6 trillion. That is almost double the figure for a typical year and the highest figure since 2007. Citi predicted that 2022 will be an even better year, with a growth of another 15%. Morgan Stanley optimistically points to the financial readiness of parties who have over '800 billion at their disposal for potential deals and continue to raise money. On the other hand, in recent months the M&A market has taken a turn due to the war in Ukraine and further global supply chain issues. It is yet to be seen how this will evolve in the coming months and how resilient the market will remain. In any case, each transaction consists of a tailored negotiating schedule with specific issues that have to be dealt with.

One of the most heavily negotiated matters in acquisitions are the indemnification rules. While a seller agrees to a number of representations and warranties, these cannot be relied on indefinitely. They may be time-barred, or made subject to caps, de-minimis clauses or baskets. Apart from this, certain specific indemnities may be agreed on which form an exemption to these rules. And then we are not yet talking about any general or specific disclosures of certain information which may impact the representations and warranties. Depending on each party's bargaining power and the nature of the transaction, these clauses may either favour the buyer or the seller.

As these clauses are essential to determine the risk between the parties and may have large financial consequences, negotiations about this scope and duration are often difficult. To facilitate them, parties may seek alternative solutions. One of them is to choose to enter into a warranty and indemnity insurance (W&I insurance). Such insurance covers the seller's liability in the event of a breach of its representations and warranties under the share purchase agreement (SPA), and even in some cases in the event of a specific indemnities.

Adoption in Belgium

It is clear that W&I insurance is still a novelty on the Belgian M&A market, albeit growing strongly. While in 2012-2016 the use of such insurance was only noted in 3% of all Belgian transactions, this rose to 8% in 2016-2020 (M&A Survey - Fifth Edition).

However, in 27% of all Belgian transactions with a value over 100 million euros such insurance is already adopted. It is clear that such result is...