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M&A, Bankruptcy, and Insurance (Part 1)
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Growth: acquisition, merger, and LBO

In looking at different policies such as the Commercial General Liability, Business Auto, Employment Practices Liability Insurance, Directors & Owners, and even Crime and Property, the forms often include terms like "acquisition", "consolidation", "newly formed", etc., giving limited coverage for limited time periods for these events. However, the forms do not typically define such terms. Let's look at some of the key terms that we will encounter in this course.

Transition via growth


In a growth mode a client can certainly grow within the original structure of the company, but sometimes a company grows by merging with or purchasing another organization.

Acquisition
"Acquisition" refers to any type of purchase of one business by another. It is the more general, or generic, term for the taking over of one or more business entities by another.

Many coverage forms use this word, which is beneficial to the insured as it is the broader term for takeovers. For example, the CGL policy refers to newly acquired companies for a limited period of time (coverage ceases on the 90th day from the date of acquisition).

Acquisitions may be accomplished in a couple ways:
  • Asset-only purchase
  • This may not necessarily transfer liabilities to the buyer.
  • Each products or tort case will be looked at independently as to case law in that state, the purchase agreement, and the facts of the case.
  • Assets and liabilities
  • The acquiring company assumes previously incurred and future liabilities arising out of past operations.

    The state of jurisdiction is often the state of incorporation. So the issue then is a serious one for the acquiring company, who is often referred to as the "successor".

    Merger
    A "merger" is a contractual and statutory process in which one corporation (the surviving corporation) acquires all of the assets and liabilities of another corporation (the merged corporation).

    The shareholders of the merged corporation receive either payment for their shares or shares in the surviving corporation.

    The acquired company is absorbed into the purchasing firm and it ceases to exist as an entity. No new entity is formed.
    Source: West Business Law

    Similar to a merger is a consolidation. A "consolidation" is the combination of two separate corporations into a single new entity. The law views mergers and consolidations as continuations of the previous company or companies. Almost without exception, the current company will be held liable for actions of the preceding company.

    Leveraged buyout
    You may have heard of "leverage buyout", but do you know what it really means? Most people don't.

    Also known as "leverage acquisition", a leveraged buyout involves the purchase of the assets or stock of a business enterprise under a financing arrangement involving a significant amount of debt and very little or no equity capital, primarily by using the assets of the acquired enterprise as collateral and the acquired earnings stream to amortize (or retire) the debt.

    Notable mergers and acquisitions
  • BP-Amoco and Arco
  • Boeing and McDonnell-Douglas
  • Daimler-Benz and Chrysler
  • Exxon and Mobil
  • MCI and WorldCom
  • Microsoft and Hotmail.com
  • Netscape and AOL
  • Quaker Oats and Snapple
  • Travelers and Citibank
  • US Air and British Airways
  • Volvo and Ford


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    © 2004, LunchTimeCE, Inc and Insurance Skills Center. All Rights Reserved.

    Not only are policy forms, clauses, rules and court decisions constantly changing, but forms vary from company to company and state to state. This material is intended as a general guideline and might not apply to a specific situation.
    The authors, LunchTimeCE, Inc. and Insurance Skills Center, and any organization for whom this course is administered will have neither liability nor responsibility to any person or entity with respect to any loss or damage alleged to be caused directly or indirectly as a result of information contained in this course.