The importance of a Warranty and Indemnity Insurance (W&I Insurance) in the Dutch M&A market keeps growing. Aforementioned is illustrated by an interim relief judgment in the case J-Club/Nordian in which obtaining W&I is a condition precedent for signing the Sale Purchase Agreement (SPA). In the slipstream of the growing importance, the amount and magnitude of claims under the policies are also increasing. This Newsflash provides a short summary of the judgment and will touch upon COVID-19 challenges of W&I Insurance.
J-Club is the target company of Dutch investment fund Nordian. J-Club's activities involve placing displays with all sorts of fashion accessories in wholesale stores, with a sale of these products on a commission basis. J-Club is active in 22 countries and has placed 28,000 displays.
By the end of February 2020, Nordian made a binding offer of EUR 125 mio for 100% of the shares in J-Club. Following the binding offer parties negotiated about the SPA. During these negotiations, the parties discussed the COVID-19 pandemic and agreed not to include a material adverse change clause or a specific COVID-19 clause in the SPA. Subsequently, Parties agreed upon the text of the Signing Protocol. The Signing Protocol contains the following condition precedent (the W&I Insurance Condition) about obtaining W&I Insurance:
"2.1 The Parties acknowledge that the Agreed Form SPA cannot be signed until Nordian Capital has taken out a W&I insurance policy in respect of the Proposed Transaction providing coverage for the far majority of the claims under the Seller's Warranties as well as claims under the Tax Indemnity, as defined in the SPA (…)
2.2 (…) Nordian Capital shall use best efforts to fulfil the W&I Insurance Condition as soon as possible (…)"
Nordian informed Sellers on 10 March 2020 that the W&I Insurance has almost been finalised, there are a number of tax exclusions Nordian would like to have deleted. On 19 March 2020, Nordian sent J-Club an email with the request to freeze the transaction process, because of the COVID-19 pandemic. After extensive discussions, in which Nordian (amongst other things) argues that the W&I Insurance Condition in the Signing Protocol has not been met, J-Club decides to instigate interim relief proceeding to force Nordian into signing the SPA.
The court rules, in short, that Nordian prevented the W&I Insurance Condition from being fulfilled. Considering the circumstances of the case, Nordian could not reasonably decide to do so and as a consequence the reasonableness and fairness provide that the W&I Insurance Condition must be deemed fulfilled pursuant to article 6:23 Dutch Civil Code. The court concludes that Nordian is required to sign the SPA.
COVID-19 challenges of W&I Insurance
In this case, Nordian seems to have made improper use of the W&I Insurance Condition to address COVID-19 uncertainties. However, that does not detract from the fact that COVID-19 can indeed significantly impact the process of obtaining W&I insurance as well as successfully subsequently claiming under a W&I Insurance policy.
In the first place: warranties and W&I Insurance cannot be a substitute for a thorough due diligence process. Subjects such as compliance with health and safety regulations, effects on material contracts and impact on the target's financials could come under increased scrutiny from a W&I insurer in the current climate. Moreover, when claiming under a W&I Insurance policy COVID-19 impact on the target's financial could well qualify as a known risk and be excluded from coverage.
Some W&I insurers may consider to draft specific COVID-19 exclusions, which requires a careful review by an insured what loss is excluded as a result. That ties in with another challenge when claiming under a W&I Insurance policy, being what covered loss an insured suffers as a result of a breach of warranty. That requires an accurate assessment of the breached warranty viewed together with the loss provisions in the SPA and the W&I Insurance policy.
In conclusion, an insured faces (COVID-19 and other) challenges when taking out and claiming under a W&I Insurance policy.
CMS will discuss these challenges, as well as other pressing questions and aspects of this complex insurance product, in their webinar of 24 September 2020 at 12:30h (CET).