In most cases, a buy side W&I policy is sought, since the seller is often unable to stand behind any of the warranties. W&I policies extends to coverage for fundamental, general and tax warranties, meaning the buyer can rely on the policy in the case of any breaches. As such, since the fundamental warranties (and thereby the title to shares) are already covered by the W&I policy, what are the correct set of circumstances when insurance for title to shares should also be considered?
The key items that need to be reviewed are:
- The enterprise value (EV) and the limit of W&I insurance considered;
- The binary risk associated with ownership – does the full deal value needs covering?
- The jurisdiction and any questions of the sellers’ capacity to sell.
For deal values under GBP10-15m, it is common that clients will obtain W&I insurance to cover the whole purchase price, due to minimum premium levels and cost of capacity. In this instance, there would be no need to purchase the additional title cover, as the W&I policy will cover title risks (contained within the fundamental warranties) up to the full EV.
However, for deal values in excess of GBP20m, it is typical that circa 15%-30% of purchase price is covered by the W&I insurance, as clients do not usually consider there to be a risk that the general or tax warranties will exceed 15% - 30% of EV. In fact, the cost to top the full W&I package up to the full EV would in most cases be prohibitive.
As title risks are arguably binary, there is a gap in cover between the 15%-25% of EV (insured by the W&I) and 100% of EV, which could well be hit if there was a breach of an ownership warranty.
This gap in cover for the ‘title to shares’ risk needs to be strongly considered. Whilst in some jurisdictions the titles can ‘easily’ be checked on a share register (or similar) by property lawyers, in many territories this cannot be done; associated risks, such as restitution, regularly materialise. Since claims are becoming more frequent for title breaches, our clients have begun asking for full cover for these risks.
Whilst W&I insurers can sometimes provide this ‘top up’ for small deals, a separate title policy should always be considered. Our clients want certainty that risks concerning the capacity to sell, the ownership of the asset/shares, and the ability to transfer amongst others are irrefutably covered - and up to the full purchase price. Unlike W&I policies, the trigger does not need to be a breach of warranty, the risk is simply covered under a widely worded insured event in the title policy.
A title policy can either sit in excess of a W&I policy (as the fundamental warranties are still covered up to the 15% -25%) but generally we recommend placing this from ground up. That way, there would also be no aggregation of limits and no disagreements between insurers as to who will pick up the claim. In the event that the title policy does sit above the W&I policy, the excess can drop down to nil after 7 years (when the W&I policy terminates) to cover the full EV, since title policies last in perpetuity.
Ownership issues, which become evident following a transaction and lead to litigation, are becoming increasingly common throughout Europe. The ongoing, high profile Italian court case between a large institutional investor and a local seller is a good example. Both parties claim ownership following completion; the Seller argues that the Buyer took control of the building at a lower-than-market price while the Seller faced financial difficulties and, as such, the transaction should be voided. This risk (including the legal fees, which are likely to exceed several million euros) would have been insured under a title policy, and up to the full purchase price.
Due to the current climate, there are likely to be situations where governments will be providing financial assistance to distressed companies and, in doing so, could block or make void a transaction once it has completed. These risks would also be covered under a title policy.
It might of course be the case that the seller will offer a ‘full purchase price indemnity’ to cover these fundamental risks. However, due to the increased knowledge of the title insurance solution, sellers are beginning to remove these indemnities in the SPA, especially when they are winding up a fund. By using this product to their advantage, sellers can make a cleaner exit from the transaction and offer the buyer the benefit of the title policy.
In summary, title policies are often purchased alongside W&I policies. The gap in cover between the W&I limit and the purchase price needs to be considered and title policies are an attractive solution.
Gallagher’s M&A team comprises title insurance and M&A specialists shortening lines of communication and allowing for a smooth transaction. Our dedicated team have worked on some of the most complex transactions and can find solutions for your risks, from tax to title.