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Forecasts of increased M&A activity, combined with a global economic climate where risk aversion is the name of the game, present an opportune moment for examining M&A insurance as a viable means of reducing risks in business transactions.

The most common type of transaction insurance is Representation and Warranties (R&W) insurance, which targets the net liabilities facing parties in M&A deals.

Intended to help smooth negotiations and closings, R&W insurance seeks a balance between buyers’ concerns for losses resulting from breaches of representations and warranties, and sellers’ interests in liability protection. As an alternative to traditional mechanisms of risk management (e.g., escrows, holdbacks, indemnities), R&W insurance addresses both buyer and seller concerns.

This post was contributed by Éric L’Italien, Lawyer, Norton Rose Canada

Given the shaky economy over the past couple of years and the reduced number of takeovers, mergers and acquisitions, one would have expected a decline in indirect compensation such as golden parachutes.

However, according to a recent Alvarez & Marsal study, there has been a 32% increase over the past two years in the average value of the change-in-control benefits (i.e., golden parachutes) provided to US executives. Considering that the evolution of change-in-control benefits in Canada tends to be influenced by what takes place in the United States, it’s likely that a similar trend exists in Canada.

Golden

Change-in-control benefits generally take the form of an employment contract clause by which the company agrees to pay the employee (usually an executive) significant benefits in the event of a change in the company’s ownership. These benefits are typically severance payments, bonuses or stock options. Such benefits are rarely, if ever, tied to performance.

This practice has made shareholders and boards of directors reluctant to reach agreements that enable executives who haven’t been terminated or had significant changes made to their terms and conditions of employment to receive benefits upon a change-in-control.