Risk Management Pitfalls in Mergers and Acquisitions

Legal liabilities have the potential to derail M&A transactions. Asking tough questions is key to the due diligence process; targeted insurance can be key to mitigating risks.

Many companies are looking at merger and acquisition (M&A) activity as a wise way to put their cash to work. Before they move forward, however, corporate executives need to be aware of some dramatic shifts in the global landscape for strategic transactions. Compared with a decade ago, there is greater potential today for unseen and underappreciated risks that could hinder an otherwise sound merger or acquisition.

In the aggressive timelines that companies often adopt for the closing of transactions—which are more compressed now than they were in the past—due diligence may be abbreviated. This accelerates the M&A process but also increases the risks that the acquiring company will not fully identify the target company’s historical and ongoing liabilities. Among these liabilities are environmental liabilities, exposures faced by directors and officers, and other legacy exposures.

Successor Casualty Liability: How Long Is the Tail?

Overseas M&A transactions can house both known and unknown successor liabilities, and challenges around legal due diligence may be compounded by language and cultural barriers. The use of claims-made policies, and the risk of discontinued products causing future losses, can seem daunting to an acquiring company. Many countries also require businesses operating within their borders to buy local or “admitted” insurance, raising questions about the adequacy of the coverages and the financial limits of protection, not to mention the solvency of the insurer that wrote the policy.

For liabilities that may be inherited in a global merger or acquisition, acquirers may want a controlled master program (CMP). This type of insurance addresses the potential inadequacies of the target company’s local or admitted insurance policies. Are there certain international exclusions in the current program that need to be addressed? The master insurance policy closes perceived gaps in coverage and/or financial limits, while simultaneously maintaining the local insurance policies in force. A CMP also ensures the efficient coordination of foreign insurance policies under one roof, with potential premium savings and additional cost-effectiveness from economies of scale.020314_Gillston_PQ3

In addition, if the target company might require a pollution cleanup in the future, the acquiring company should consider issues such as the possibility of cost overruns during the cleanup effort. One option for dealing with this is risk remediation cost containment insurance, which is available from specialized M&A insurance carriers. By minimizing the risks that a cleanup project will cost the company more than anticipated, the coverage mitigates the financial uncertainty associated with acquiring a site and undertaking its redevelopment.


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