478 16 Key Provisions of the Acquisition Agreement
may be known but the amount or timing of payment is uncertain (for example,
there may be a duty to make pension payments or to pay bonuses to employees).
Representations and warranties typically cover such things, and the acquirer
will rely on representations and warranties when determining the purchase price.
On the other hand, the parties may have very different views of the likelihood or
impact of the liabilities. The vendor may not be prepared to tie up monies without
an increase in the purchase price, and the buyer may not want to rely on unen-
forceable moral obligations like representations and warranties that either do not
exist or exist but have been diluted by a low liability cap.
An M&A insurance policy can provide a solution.^64 The vendor will not need to
hold monies in an escrow or reserve fund, and the acquirer will be protected by an
enforceable obligation undertaken by an insurance company.
A Representation and Warranty Insurance is usually taken out by the acquirer.
Typically, insurance protection is limited to expressly defined quantifiable things
which are covered by representations and warranties and exist at the time of con-
tracting. For example, the target’s future profitability will not be covered. As an
insurance contract is a contract that requires utmost good faith, the policy will not
cover things known to the acquirer.
The insurance company will carry out its own due diligence inspection of the
target and the documentation before issuing the policy.
There are also other types of insurance used in the context of business acquisi-
tions. They range from Directors and Officers Insurance (D&O) to Finite Risk In-
surance. One of the problems with M&A insurance is cost.
16.5 Purchase Price and the Payment Method.............................................
16.5.1 General Remarks
There are many ways to address the question of how, when and how much the ac-
quirer must pay. Typical forms of payment include: the acquirer’s own shares
(share offer); an immediate cash payment (cash offer); a cash payment in the fu-
ture (deferred payment, debt); and mezzanine instruments (convertible loan, pref-
erence shares). The consideration can be either fixed or variable and depend on the
target’s comformity with its agreed specifications, the future profitability of the
business, or future events. Furthermore, the acquirer may choose an all-cash
method, an all-stock method, or a mixed offer.
(^64) See Paar R, Protect Your Deals with M&A Insurance, The Corporate Board, Septem-
ber/October 2002.