In 2018, the Italian merger and acquisitions market recorded 882 operations (+8 per cent with respect to the 733 in 2017) for a total value of approximately €49.5 billion (+17 per cent with respect to the €41 billion in 2016).
The 2018 M&A market grew up and foreign investor interest in Italian companies was confirmed. Italian companies continue to represent an interesting investment opportunity not only in light of the strength of their brands and of the quality of their products, but also for the fact that many of them are facing generational shifts, or need capital injections (and new management features) to support their expansion, or are in turnaround situations.
In 2018, investments in M&As by Italian companies and entrepreneurs had an unexpected growth. They invested €35 billion (+41 per cent from the €20.6 billion last year), both in the process of domestic consolidation and in transactions abroad, mainly in the US and in South America.
Again for this year interest in the Italian market will continue: for all analysts, the expected trend for 2019 is positive.
Also for the current year an important trend worth mentioning, in the negotiation of agreements for mergers and acquisitions, concerns warranty and indemnity insurance for transaction liability.
The adoption of this kind of insurance is spreading more and more, and increased in the past year, both in domestic and cross-border transactions.
Warranty and indemnity insurance provides protection against losses suffered by the buyer in the event of breach of the seller’s warranties in an M&A contract.
Despite a thorough due diligence activity, unknown risks may remain, seriously affecting the value of the new company or the company acquired. Warranty insurance provides financial protection against this type of risk.
There are two kinds of warranty and indemnity policies.
A seller-side policy is constructed as third-party insurance. The policyholder is the seller. By means of this policy the seller ensures that any compensation for damages suffered by the buyer in the event of the breach of the representations and warranties is covered.
This type of policy normally has a ‘mirror structure’ because its terms and conditions guaranteed, its ceiling and the period of coverage coincide with the representations and warranties, the amount of the contractual liability limit negotiated between the parties and the period provided for in the purchase agreement.
In particular, the seller’s representations and warranties are copied and rewritten in the policy, because they constitute the object of the insurance coverage. Even the definitions in the policy are the same as those in the acquisition or merger agreement.
In an acquisition agreement, this type of policy may have some advantages for the seller.
First of all, it can help the seller to negotiate a higher price for the target company. It can also avoid the use of fidejussioni (a type of personal guarantee), which are expensive, often hard to find and which transfer the risk to third parties. Furthermore, in a fidejussione contract, article 1950 of the ICC provides for the right of recourse of the guarantor against the principal debtor.
Instead, with an insurance policy, in case of losses the insurer has to indemnify the buyer, without any right of recourse against the seller.
Generally speaking the policy is usually ‘tailor made’ and based on the specific needs of the parties.
A possible negative effect of choosing warranties and indemnities insurance is the fact that the negotiation process may become more cumbersome as it will involve three parties and not just the buyer and the seller.
A second issue that may arise, concerns fraud on the part of the seller. In this respect article 1917 of the ICC states that the insurer is not obliged to indemnify the insured when the damages are caused by him or her intentionally.
Accordingly, the paradox would arise that in this case, the warranty and indemnity insurance would not cover the most serious case of breach (ie, when the seller fraudulently provides misleading representations and warranties).
The buyer-side policy is constructed as a first party insurance (or insurance for damages).
The buyer is the policyholder who ensures that he or she has an extra layer of protection compared to that provided in the acquisition agreement, in the event of breach of warranty by the seller.
This kind of policy is normally selected when there are limited possibilities of taking legal action to recover damages against the seller. Unlike the seller-side policy, this one does not have the above-mentioned ‘mirror structure’ but normally guarantees higher coverage to buyers (ceiling, duration and conditions) compared to what is provided by the seller in the agreement. For example, it may provide for an extension of the coverage period after that negotiated in the agreement, or a higher ceiling than that warranted by the seller.
For this kind of policy, an issue could be the relationship between the duration of the seller’s representations and warranties and the period of the warranty and indemnity insurance coverage.
According to Supreme Court ruling No. 16963 of 24 July 2014, the representations and warranties constitute an ancillary performance (prestazione), different from the case of warranties for defects that the seller must provide in a sale contract pursuant to article 1495 of the ICC. According to this article, the buyer loses the right to the warranty against defects when they are not reported by the seller within eight days of their discovery, and, in any event, within one year. The representations and warranties, instead, as they are another type of warranty, are not subject to these short terms, but to the 10-year ordinary limitation period, provided by article 2946 of the ICC.
The issue arises because insurance companies normally used to provide coverage for up to a maximum of seven years, and not for up to the 10-year limitation period. Accordingly, there could be an uncovered three-year period.
Finally, it normally takes about three weeks for the insurance policy to be issued, but when the insurance company has been involved from the very beginning of the negotiations, it is possible for the policy to be executed on the day of signing or on the closing date.
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