4. RWI for a SPAC Could Lead to Post-Merger D&O Enhancements/Savings.
More and more SPACs are looking to address claims of insufficient or shoddy diligence through the representations and warranties insurance (RWI) policy placement process.
At its core, the RWI policy is designed to protect the buyer (in this case, the SPAC) against two things: (i) the seller’s (in this case, the target’s) breaches of reps in the merger agreement and (ii) the target’s fraud. However, a valuable side benefit of these policies, especially now that the number of SPAC cases alleging insufficient diligence is growing, is the insurer’s close examination of the SPAC team’s due diligence.
This second layer of diligence by a disinterested third party over the SPAC team’s diligence is important for at least two reasons. First, it either validates the SPAC team’s diligence process or points out potential problems that could be corrected and properly disclosed between the signing of the merger agreement and the close of the deal.
Second, it is conducted by an experienced underwriting team and their top-tier legal counsel, who are usually well versed in the industry of the target and very knowledgeable about the array of potential risks present in that industry.
Many SPAC teams have explored and obtained RWI policies in the last two years. Some of the deals that come to mind include the acquisitions of Utz, Opendoor, and Paysafe. And recently, D&O insurers have started taking note of teams and deals that are willing to go through the process of obtaining an RWI policy.
Like any additional vetting, diligence, or compliance process, the steps involved and the willingness of the team to go through them signal the maturity, veracity, and sophistication of the SPAC team and its acquisition target. All those factors reduce litigation risk and add to the comfort level of the insurer that is looking to insure the post-merger entity.
In fact, very recently, at least one of the leading SPAC D&O insurers, realizing the benefits of an RWI policy for a SPAC, has started to offer price reduction options on D&O premiums for SPACs that choose to obtain an RWI policy ahead of their merger. Additional D&O insurance breaks and better terms for the post-merger combined company may also become available.
Like the ever-evolving SPAC market, the insurance market for SPACs is also evolving and adapting. We are expecting to see additional new, creative solutions to SPAC risks before the year is out.