Using Insurance to Mitigate Counterparty Risk in SPAC Acquisitions

By: Ed Cronin, Aon

Email: Edward.Cronin@aon.com

Published: September 8, 2020

Author:

Edward Cronin is Executive Vice President of Aon Risk Services. Inc of Connecticut. He has 35 years of experience at Aon providing clients with insurance services.

Aon has established a focus group to address the unique exposures faced by SPACs, their directors and officers and the sponsor LLC. Given our industry leading knowledge, technical expertise and access to key participants in this sector, we are able to keep track of the latest developments and provide our clients with innovative risk transfer solutions.  In this article, we will discuss the various insurance coverages and practices to help enhance and protect your SPAC acquisition. 

Representations & Warranties Insurance

Utilizing representations and warranties insurance in connection with such an acquisition can provide SPAC investors with benefits that secure the value of such investments by replicating market terms for private company acquisitions. 

Due to the unique nature of SPAC transactions, investors typically have limited or no recourse against the selling shareholder(s) for breaches of representations and warranties in the purchase agreement.  Most investors want to avoid the situation where they’d be averse to their management partners if an indemnification claim arises.  As a result, these dynamics leave investors exposed to the myriad of potential losses private company acquirers often face due to potential breaches of sellers’/management’s representations and warranties (whether innocent or malicious).   

Improved Deal Outcomes

Dealmakers typically navigate this potential conflict in private company transactions through the use of representations and warranties.  Such insurance affords an investor the benefit of a comprehensive package of representations and warranties in the purchase agreement, which is backstopped by a separate insurance policy.  In a SPAC placement, a representations and warranties insurance policy would be tethered to the representations and warranties negotiated between the SPAC and the seller(s),and would reimburse the SPAC for any losses resulting from unknown breaches of any representations and warranties, with the sellers’ representations and warranties still lapsing at closing.  Accordingly, the dynamic from the seller’s perspective will not have changed at all, while the buyer receives the protection it expects in a non-SPAC deal.

Case Study

We recently helped place a representations and warranties insurance policy in connection with a multi-billion-dollar SPAC acquisition.  Using representations and warranties insurance the SPAC secured coverage for 5% of enterprise value and on terms similar to a traditional seller indemnity, with the added benefits of:

  • An extended survival period under the policy,
  • A synthetic pre-closing tax indemnity,
  • A synthetic double materiality scrape, and
  • An insured favorable definition of loss.

The aggregate retention (deductible) was equal to 0.75% of enterprise value, comparable to a typical deductible under a traditional seller indemnity. 

Our Advantage

Aon’s Transaction Solutions team has placed representations and warranties insurance on a number of successful transactions involving SPACs in the past year.  We advise clients on navigating the complexities of a SPAC structure, including the extended interim period between signing and closing, rollover and lockup dynamics, as well as the regulatory filings related to a SPAC acquisition. 

Management Liability (Directors’ & Officers’) Insurance

The evolving exposures faced by a SPAC and its management are unique and require a D&O program that offers flexibility and optionality through the life cycle of a business combination.  Aon has been able to differentiate SPACs by educating the insurers in this space on their inherent mitigating risk factors.  This, combined with our superior leverage in the marketplace, has enabled Aon to provide SPACs with a risk transfer contract which includes best in class terms and conditions to address the following:

Initial Public Offering: 

The liability faced by the directors and officers of a company filing an initial public offering is high.  As the SPAC must locate a company, negotiate a merger agreement, file proxy materials with the Securities and Exchange Commission in seeking approval of the transaction and, if shares are being offered to the target’s stockholders, register the shares being issued, liabilities associated with federal and state securities law violations are heightened.

Acquisition Process:

Mergers and acquisitions are fraught with D&O risk and SPACs are faced with an acute exposure in this regard.  The concern is that of potential liability that the SPAC and in turn, Sponsor, may subject themselves to with a target company in connection with the SPAC’s proposed business combination.  Potential issues that could lead to a claim include tortuous interference, fraudulent inducement, sufficient due diligence, adequate consideration, conflicts of interest and failure to close a proposed transaction.  In addition to fraudulent inducement, a claimant/target company could assert a claim for promissory estoppel under such facts. Finally, there is also the possibility that the claimant/target company could assert a claim for business defamation against the SPAC.  With SPACs typically required to liquidate two years after its IPO, the structure of any D&O policy should be contemplated upfront (i.e., pre-negotiated tail coverage, policy period of 12, 18 or 24 months, coverage for the combined business post-close, etc.). 

Due Diligence for Risk & Human Capital

Through due diligence, Aon highlights decision points and identifies options ensuring you pay the right price for the target.  We provide inputs and recommendations for your 100-day action plans and our integration services to help you seamlessly execute your post-closing business strategy.

Our team will identify issues and offer solutions that can impact your purchase price and return on investment.  We help you minimize go-forward risk and people costs by focusing on EBITDA, balance sheet, compliance and credit implications of the risk and benefit programs to help facilitate your business strategy. 

Email: Edward.Cronin@aon.com

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