A Trending Security Model Of M&A Transactions: "Warranty Insurance"

Introduction

Traditional security models against warranty claims under the Merger and Acquisition ("M&A") transactions are commonly recognised as escrow mechanism, purchase price retention, share pledge and bank or parent company guarantees. Due to the characteristic difficulties of such security models, the market has invented a more effective supplementary protection method in lieu of the customary ones. The underlying reason of market's intervention is derived from potential pitfalls of traditional techniques such as requirement of depositing material part of the transaction income to a temporary account in case of a potential future indemnification (lacking from any possible interest or investment opportunity for years as in escrow mechanism). On the other hand, issuance of bank/parent company guarantees may mostly cause a substantial burden of time, cost and effort.