Mergers & Acquisitions

Are there other insurance solutions for transactions?
Whether a company is looking to emerge from Chapter 11 bankruptcy or contemplating a transaction outside of bankruptcy, tax uncertainties often arise and may get in the way of the business goals of the parties. Tax insurance is invaluable in these situations.
For example, in one situation, a plan of reorganization required the funding of an escrow account to backstop a tax indemnity covering ‘golden parachute’ excise taxes under Code Section 280G. This effectively required the creditors of the company to wait up to six years for the IRS statute of limitations to lapse before funds could be paid. A tax insurance policy insured the former executive who was the beneficiary of the escrow in the event of a successful IRS challenge. Funds equal to the policy limit were released from the escrow account and paid to the creditors of the estate.
Bankrupt companies will often hold net operating loss carry forwards (NOLs) that can be used to offset taxable gains. Code Section 382, however, limits the ability of the successor company to use the historic NOLs going forward, except in limited circumstances. Whether or not these tests have been satisfied will require a determination by counsel and would leave the estate and/or the successor company with a tax bill should such determination be challenged by the IRS.
A tax policy ensuring that the Code Section 382 limitations have been properly applied would provide comfort to the parties to proceed with the transaction. The policy would cover tax, interest, penalties, contest costs and a gross up. Such a policy could insure the estate if it is required to provide a tax indemnity. Alternatively, it could ensure that the successor corporation will obtain the economic benefit expected.
Note that tax issues involving utilization of NOLs are not unique to bankruptcy and can arise in other deals, as well. Recent TARP legislation also enhanced the availability of NOL carry backs for various transactions.
RWI and tax insurance are the insurance products most commonly used in distressed deals, along with coverages such as environmental insurance. But outside of these areas, it is often possible to craft unique insurance solutions to address unusual issues that may arise in a distressed deal.
Transaction liability products can make the difference between completing a transaction or not, and the value is even apparent in distressed deals, in which the ability to close a deal can alter the future of the company.
Ann Gelfand is managing director at Aon Risk Services Central Inc. Reach her at (314) 719-5187.