February 02, 2016 Articles

Address Fundamental Coverage Issues Before Completing a Deal

To protect both the buyer and seller in transactions, it may be prudent for companies in the deal cycle to consider insurance coverage issues as part of their due diligence review

by Amy J. Fink

Insurance is not usually at the forefront of the minds of those in the business of closing deals. Furthermore, pressure to close a deal can cause companies to overlook or dismiss insurance issues. However, it may be important for both sides of a transaction to consider insurance coverage issues that could harm or protect both buyers and sellers. Insurance issues can have a significant impact on financial considerations that may be relevant to a deal. On the one hand, insufficient insurance can break a deal or lead to unpleasant surprises after a deal has closed; on the other hand, insurance can be used as a tool to help save a deal and protect the valuable consideration paid in conjunction with a transaction.

The Deal Structure Can Have a Profound Impact on the Transfer of Insurance

A fundamental consideration is the impact of the deal structure on the availability of insurance coverage post-closing. There are three frequently employed structures for a transaction: (1) a merger, (2) a stock purchase, and (3) an asset purchase. In mergers, generally the surviving corporation assumes the merged company’s liabilities and obligations.[1]  In contrast, in stock purchases, the target company generally remains the same and its liabilities generally remain with the target, but they may still affect the consolidated financial statements.[2]  Further, in asset purchases, the buyer company generally is not liable for the seller company’s debts and liabilities, with exceptions, however, such as the following: when the buyer agrees to assume the debts or liabilities; where the sale is in reality a merger of the two businesses, known as a “de facto” merger; when the sale is fraudulent; when the buyer is merely a “continuation” of the seller; and when the buyer does not comply with the state’s laws requiring the buyer to notify the seller’s creditors within a specified period before it takes possession of the assets or pays for them.[3]  

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