Special Purpose Acquisition Companies (SPACs) are formed for purposes of merging with or acquiring companies. SPACs raise capital through an initial public offering, then typically have eighteen to twenty-four months to invest capital in a target company or companies. A SPAC’s merger with the target company is referred to as the de-SPAC transaction. Although SPACs have existed for many years, they have gained popularity over the last few years and 2020 has already surpassed previous SPAC fund-raising records.
An emerging trend in de-SPAC transactions is the increased utilization of M&A insurance. Although some SPAC managers are embracing the use of M&A insurance, M&A insurance is not used as frequently on de-SPAC transactions as it is on private, buy-out transactions. In the following sections we outline the benefits to using M&A insurance on de-SPAC transactions and dispel myths that have dissuaded SPACs from using M&A insurance in the past. M&A insurance refers to the following insurance solutions:
- Representations and Warranties (R&W) insurance. R&W insurance provides the insured party with protection against losses arising out of breaches of the representations and warranties that are given by seller and target in the transaction agreement. R&W insurance reduces or eliminates the need for a traditional seller indemnity, as buyer receives comparable contractual protection from an A-rated insurance company.
- Tax insurance. Tax insurance provides financial protection against the failure of an investment or a tax position to qualify for its expected tax treatment. Tax insurance is frequently used on M&A transactions to ‘ring-fence’ potential tax liabilities at a target company.
- Contingent liability insurance. Contingent liability insurance is a highly bespoke solution that can be used in a wide range of situations to isolate potential losses that may arise from known risks that are remote but could result in significant loss.
There are various benefits to buyers and sellers in using M&A insurance, but the following are particularly relevant for SPACs:
- Key relationship preservation. Management at the target company will usually continue to manage the merged company following the de-SPAC transaction, and the target’s existing shareholders will usually retain equity following closing. By utilizing M&A insurance, the buyer can bring a claim directly against an insurer rather than needing to initiate a potentially adversarial and distracting process with management or the sellers.
- Protection for the SPAC’s directors and officers from shareholder lawsuits. Directors and officers at publicly traded companies are vulnerable to lawsuits from investors and SPACs are no exceptions. Shareholder lawsuits may be brought following the de-SPAC transaction if the target incurs unforeseen liability or other types of damages are suffered. M&A insurance reduces the risk of shareholder claims as the company and, indirectly, the shareholders will be indemnified for losses that arise out of a breach of a representation and warranty or a tax or contingent liability issue that were covered.
- Competitive pressure. SPACs are often competing for attractive target companies, either in an auction process or against the alternative offered by a private sale. The competition – private equity firms and corporates – are generally comfortable using M&A insurance and offering sellers a clean exit on the transaction. If a SPAC is unwilling to use M&A insurance their offer will be viewed as less competitive and it may need to increase its purchase price to compete with alternative sale options that sellers may have. The target company of a SPAC may also be considering going public through an initial public offering or a direct listing, as opposed to a reverse-merger with a SPAC. These alternative paths to going public will not require the target’s shareholders to provide a post-closing indemnity or tie up funds in escrow, so a reverse-merger with a SPAC may appear less attractive if the SPAC is seeking a seller indemnity. M&A insurance provides the SPAC with post-closing protection all while staying competitive with the alternative exit options of target’s shareholders.
Buyers and sellers on all M&A transactions should assess whether using M&A insurance for their transaction is appropriate. Concerns around timing, cost, confidentiality and claims may have dissuaded SPACs from using M&A insurance in the past, but addressing misconceptions about these subjects should provide all stakeholders involved in de-SPAC transactions with the comfort to pursue M&A insurance:
- Timing. The M&A insurance market is accustomed to working on ‘deal timing’. The first step of the insurance procurement process involves having your broker solicit quotes, and this can be completed in 2-3 business days. The second (and final) phase of the process requires the buyer to engage an insurer to start underwriting and complete the underwriting process. The underwriting process is typically completed in 5 business days, but it can be compressed to accommodate faster deal timelines.
- Cost. SPACs generally must operate within a reasonable budget and not incur unnecessary and irrecoverable costs before the closing of the de-SPAC transaction. An M&A insurance policy can be explored and ultimately bound with minimal capital requirements. There is no cost to obtaining quotes so the SPAC can get visibility into what can be covered and other policy terms without committing to any fees. To start the second phase of the process the SPAC will be obligated to pay the insurer’s underwriting fee. This fee is typically $25k-$40k, but insurers are often willing to defer payment until closing. The other pre-closing cost component under a usual M&A insurance policy placement is the deposit premium, which is typically 10% of the premium and becomes payable when coverage is bound at signing. McGill and Partners can structure a solution, however, for SPAC transactions whereby the 10% premium deposit does not need to be paid at signing, nor would the SPAC be obligated to pay a break fee if the transaction does not close. In other words, coverage can be fully underwritten and bound at signing, and the SPAC would only need to commit to a nominal ($25k-$40k) underwriting fee, with all other expenses only becoming payable upon closing.
- Confidentiality. There are many reasons why M&A transactions must remain confidential until they are announced publicly, and this is especially true for SPACs. The M&A insurance market is staffed with M&A professionals that understand the importance of confidentiality and the potentially irreparable harm that can come from leaks. Many of the largest and most sensitive transactions that have taken place in recent years have successfully used M&A insurance. Further, it is common practice for confidentiality agreements to be put in place with the insurance broker and all insurance carriers before any confidential information is shared.
- Claims. An insurance policy is only valuable if it will pay out when the policyholder suffers a loss. The M&A insurance market has demonstrated in recent years that it will respond to valid claims, with approximately 95% of claims being paid according to recent survey respondents (Lowenstein Sandler, 2020). At McGill and Partners our dedicated M&A claims team, which has unique insight from professionals that have been involved in claims while employed by insurers, works with our clients to ensure claims are being presented to insurers in the most effective way possible and advises our clients on negotiation and resolution strategies.
McGill and Partners is a boutique insurance broker focused on exceptional client service and superior results. Our decades of global experience combined with legal and investment banking backgrounds enable us to deliver market defining risk solutions. We have structured M&A insurance across the M&A spectrum including buy-outs, corporate acquisitions, minority investments, carve-outs, take-privates, fund restructurings, de-SPAC transactions and GP-led secondaries transactions. Additionally, we have placed M&A insurance across industry verticals that are common targets for SPACs, including technology companies throughout the growth lifecycle, as well as life science and pharmaceutical companies, allowing us to advise our clients on diligence focuses for underwriters and other coverage enhancements. With our experience, creativity and tenacity, we help clients embrace acquisition opportunities with confidence.
The bolder your ambition, the better we become
If you would like more information, please contact:
Jeff Buzen | jeff.buzen@mcgillpartners.com
James Swan | james.swan@mcgillpartners.com
Charles Inglis | charles.inglis@mcgillpartners.com
Sam Murray | sam.murray@mcgillpartners.com
Edward Ring | edward.ring@mcgillpartners.com
Abheek Dutta | abheek.dutta@mcgillpartners.com