In the last few years, a number of specialist underwriters of transactional – mergers and acquisitions (‘M&A’) – insurance products have set up shop in Singapore. Following from the successes in the London market, underwriters are now turning their attention to Singapore.
Typically, M&A insurance products take the form of warranty and indemnity insurance policies (“W&I Policies”). These policies are taken out to indemnify the insured should there be loss suffered following the occurrence of an insured event (usually, breach of warranty and indemnity clauses under the sale and purchase agreement).
Given that claims under such policies are still relatively unheard of, there are quite a few question marks as to how W&I Policies would operate in practice. In Finsbury Food Group Plc v Axis Corporate Capital UK Limited & Ors  EWHC 1559 (Comm) (“Finsbury Food”), the England & Wales Commercial Court addressed a few question marks. We discuss below.
Finsbury Food – Background & Decision
Finsbury Food Group Plc (“FFG”) entered into a sale and purchase agreement with Ultrapharm Limited (“Ultrapharm”) to purchase Ultrapharm for £20 million (the “FFG-Ultrapharm SPA”). Pursuant to the FFG Ultrapharm SPA, Ultrapharm warranted that as at the ‘Accounts Date’, there was no material adverse change to its trading position (the “Trading Conditions Warranty”) and there was no price reduction that would reduce the company’s turnover (the “Price Reduction Warranty”). FFG also purchased a W&I Policy for the FFG-Ultrapharm SPA.
Following the sale of Ultrapharm to FFG, FFG alleged that there was a breach of the Trading Conditions Warranty (due to there being a change in Ultrapharm’s recipe) and the Price Reduction Warranty (due to price reductions offered by Ultrapharm to its major customer). FFG contended that the breach of warranties meant that the purchase price paid by FFG exceeded the warranted value of Ultrapharm. FFG sought indemnification under its W&I Policy for the overpaid purchase price (in excess of £3 million).
In determining the first W&I claim, the Commercial Court rejected FFG’s claims. On the alleged breach of Trading Conditions Warranty, it found that the change in recipe was not a ‘material adverse change’ and even if it was, the change came into effect before the ‘Accounts Date’. On the alleged breach of Price Reduction Warranty, it found that FFG had unfettered access to Ultrapharm’s financial documents during the due diligence process and had knowledge of the price reduction (which could reduce the company’s turnover). Further, even if there had been a breach of warranty, it was determined that FFG would have suffered no loss because FFG would have paid the same purchase price – £20 million – to acquire the goodwill associated with Ultrapharm’s reputation in the gluten-free market so as to improve FFG’s own market relevance.
Takeaways and Remaining Question Marks
Following the decision in Finsbury Food, it is now clear that W&I Policies will not be a backdoor for M&A parties looking for an easier route of recovery. Similar to breach of contract claims, insureds looking to claim under their W&I Policies will need to show that breach of warranties / indemnities caused loss (that would not otherwise be suffered). That said, provided that insureds can so establish causation, W&I Policies serve as an additional route of recovery.
What remains outstanding after Finsbury Food is the definition of loss. On one hand, loss can be the difference between the actual value paid towards the purchase and the value of the company absent those breached warranties. This was advanced in Finsbury Food. On another hand, insureds may argue that absent those breached warranties, the loss suffered takes the form of reduced future dividends or reduced future exit value of the company. With respect to future losses not yet suffered, would the concept of loss extend to include the potential reduced value of the company in the event the insured may wish to explore exiting its investment? In this regard, clear policy wordings defining loss will be absolutely crucial.
The growth of W&I Policies in Asia, and the relatively untested nature of such policies, will definitely be of great interest in the financial lines space. No doubt, we will see such claims going through the local courts and arbitral institutions in due course. As insurance specialists, we advise on a broad range of claims, including those with respect to financial lines insurance. To find out how we may be of assistance, do reach out to any member of our team.