How Class Action Litigation Can Be the Death of Your Big M&A Deal

By: | November 12, 2020

Robert Underhill is Senior Vice President and Global Head of Transactional Liability at Berkshire Hathaway Specialty Insurance, which provides representations and warranties insurance, tax insurance, class action settlement insurance and other contingent liability insurance products in North America, Europe and Asia. Prior to joining BHSI, Robert was a partner at Locke Lord LLP in the regulatory and transactional insurance group where he represented insurers, investment banks and alternative investment advisors in M&A and other insurance transactions. Robert received his BA and MBA from the University of Texas at Austin and his JD from NYU School of Law. He can be reached at [email protected]

Topics: M&A

M&A transactions have been booming over the past decade resulting in a lot of buyers chasing a limited pool of opportunities.  This increase in competition for deals has resulted in shorter diligence periods and increased risk for potential buyers.

One area that can stop a deal in its tracks is existing litigation.  Buyers and sellers often place very different valuations on the exposure from litigation and this has a big impact on purchase price.   

This problem is magnified when the litigation involves a class action lawsuit.  Even when buyers agree that a class action is likely to be resolved favorably, the risk of the worstcase outcome can drastically change the buyer’s investment thesis.  This risk can cause a major discount to the purchase price, a large escrow or the buyer walking away. 

Specific litigation insurance can solve this problem by ring-fencing the risk and transferring the risk to the insurance company.   

How a BHSI Litigation Insurance Policy Saved One M&A Transaction  

For example, here is what we experienced in one recent M&A transaction where we were involved. For months, a company had been seeking to sell its business to a private equity firm.  

While the parties largely agreed on the terms for the deal, they could not agree on the potential liability arising from a class action against the company involving the Fair Credit Reporting Act (though it easily could have involved a whole range of subject matters) The parties’ views of the company’s potential exposure differed by orders of magnitude.   

The seller was not willing to either significantly discount the purchase price or fund a large escrow out of the sale proceeds because of its belief that the exposure was minimal.  The buyer disagreed.  Without a solution for this litigation risk, the buyer was prepared to abandon the transaction.

Prior to seeking an insurance solution, the company was faced with two options: Either settle the litigation on highly unfavorable terms or lose the deal.  

Instead, Berkshire Hathaway Specialty Insurance was able to bring in its MGA, Risk Settlements, with expertise to find a solution that could work for all. 

Risk Settlements is composed of litigation experts that are able to dig into an underlying litigation matter and get very granular with its risk assessment.  BHSI works closely with Risk Settlements to craft insurance solutions to existing litigation risks. 

Within the time constraints of a fast-moving M&A transaction, Risk Settlements and Berkshire Hathaway Specialty Insurance worked expeditiously to perform quantitative and qualitative analyses of the risk and design a solution that could meet both parties’ financial, legal and business objectives.  

The BHSI litigation buy-out insurance policy provided insurance for the first dollar of loss, including payment of all litigation costs arising from the class action. The cost to the company was more attractive than an unfavorable settlement, and the Specific Litigation Insurance Policy ended the disagreement over the valuation of the class action.

With the litigation buy-out insurance policy in place, the company was able to solve the existential known risk arising out of the class litigation and was able to complete its sale to a private equity investor on a timely basis.  

After the deal, the company’s insurance broker told us: “It was a pleasure working with BHSI. They quickly analyzed the class action litigation that was holding up our M&A transaction and issued a litigation buy-out policy, without which, the transaction would have been lost.”  

Existing litigation and particularly class action litigation matters are not ideal for a seller seeking to sell a business for the maximum value.  Fortunately, Specific Litigation Insurance can resolve this issue and allow parties to complete deals on terms that satisfy everyone. &

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