Closing an M&A deal is similar to closing escrow on a house. You sign documents, a wire transfer with the funds is processed, and you take possession.
Those are the broad strokes. But there are some key differences that make closing day in M&A more complex. You must also take into account the advantages offered by having Representations and Warranty (R&W) insurance in place for the deal.
The process of closing can take hours in M&A. In one case, a family business had three generations present for its sale. They were there for six hours. A long time, but well worth the $150 million they walked away with.
What takes so long?
Typically, there are more than 100 documents to review. It’s a lengthy list, a lot of it required by the attorneys, bankers and the R&W insurer.
Everything is double-checked. And there are always small, last-minute adjustments. This is routine. Throughout the negotiation process, attorneys for both Buyer and Seller send truckloads of documents back and forth. This is the final stage of that.
Keeping a business operating requires a certain amount of money (working capital). Usually, a Buyer will ask the Seller to keep those funds in the bank, and the Buyer will reimburse the Seller.
As far as the R&W insurer goes, these are the main things their Underwriters want to see (provided by the client, who is usually the Buyer):
- The final, signed purchase agreement.
- A complete set of closing documents, as well as additional supporting documents. These are to be placed in the insurer’s data vault for this client, where they can be retrieved in the event of a future claim.
- A no-claims declaration, or NCD. With this document, the client warrants that they don’t know of any breaches. If there are no problems, it’s all good.
- Outstanding documents from the due diligence call with the Underwriters.
- Payment of the R&W insurance policy premium. Policy taxes must be paid to the state the client is domiciled in through the insurance broker, who affirms to the insurer that they made that payment.
When Signing Day and Closing Day Separate
I’ve never seen a deal derailed outright at closing.
But there are certain circumstances under which signing day and closing day are separated by a length of time—typically days or weeks, although it can be months in complex deals.
If this happens, both parties agree to the terms and sign on the dotted line, but the money doesn’t change hands that day.
There are a few reasons this could happen:
1. The Buyer can’t arrange financing until the deal is signed. Once the deal is consummated, and they know exactly how much they need, they can tell the financer. Then the bank typically needs a week or thirty days to process everything.
2. The deal is signed pending regulatory approval. In the case of automaker Audi acquiring Silvercar (see Case Study), the federal government had to sign off on the deal because Audi is a foreign corporation.
3. With publicly-held companies, shareholder approval is required. For instance, when Amazon bought Whole Foods, six months intervened between signing day and closing day.
When this happens, there are certain tasks that need to be done to make sure the deal goes through. For the full details, be sure to get in touch with me, Patrick Stroth, by phoning (650) 931-2321 or emailing me at firstname.lastname@example.org.
In the meantime, here’s a simple rundown:
- The insured doesn’t pay the full premium—just 10%. And if the deal doesn’t go through, they lose that money.
- When there is a new closing date, the Buyer needs to sign another NCD (no-claims declaration) affirming that they know of no breaches between signing day and closing. There’s even a bring-down call between the client and R&W insurer to verbally confirm there are no material changes in the deal or the purchase agreement. So, if anything happens down the road, the Underwriters have that on record.
- A new final purchase and sale agreement, with any changes made between signing and closing, must be provided to the insurance company. The most common scenario here is that the Buyer is using financing for the deal, and the institution providing the financing wants to be added to the R&W policy.
- The outstanding insurance premium must be paid.
- The Underwriters want confirmation that money changed hands.
Even in the case of signing day and closing day being separated, most of the time the process runs smoothly and when the deal is done, money changes hands.
There are cases, such as when a breach is discovered between those dates, when extra attention is needed and a change in the R&W policy terms may be necessary. But you can still be protected despite the myriad of legal issues that can arise.
Reach out to me, Patrick Stroth, at Rubicon Insurance Services for details on these special cases, as well as for more information on how Representations and Warranty insurance can help your M&A deal run more smoothly.
You can also download this free report that details all the documents you’ll need on closing day.