Good deals on paper can go bad, for all sorts of reasons. Could be local market regulator, could be a financial position was overstated. Interest rates go up and suddenly the leveraged debt graph looks a bit scary. But when things do go awry sometimes it ends up being an insurance claim, since the M&A process and due diligence can often cost millions in working hours, travel, professional fees etc.
Some comment from global M&A insurer, Liberty GTS
JP Morgan has announced today that it is to make a claim on its Representations and Warranties insurance over the failed $175m acquisition of Frank, and the claim will be on the basis of fraud. Rowan Bamford, President at Liberty GTS, one of the largest global mergers and acquisitions (M&A) insurance teams in the industry, comments on what this means for all parties:
“The insurance claim that JP Morgan has announced today against Frank, the business it bought for $175m and subsequently shut down in late 2022 amid mutual acrimony, is highly unusual, and completely changes the picture for the players involved, including Charlie Javice, founder of Frank.
“It is not uncommon, of course, for insurance claims to be made on M&A insurances (known as Representations and Warranties in the US) some time after a deal has closed. However, the vast majority of claims we see are brought on the grounds of breaches of contractual warranty, and very few involve allegations of fraud. The claimant may think that their seller was less than honest in disclosing, for example, details of sales contracts, pending lawsuits or tax liabilities, but the claim is pursued as a breach of the warranty, simply because it is very difficult to prove fraud. However, when a fraud claim is brought it will almost certainly be dramatic, stressful and can lead to large losses for the seller of the company involved, if proven.
“There are also significant implications for the Frank management team. A fraud claim allows the insurer, should the claim be paid out, to try and recoup their own costs by suing the individuals who formerly owned and ran the company or who are seen as responsible for the fraud. The implication of JP Morgan claiming this on the basis of fraud therefore opens up the possibility of Frank’s company founder, Charlie Javice becoming personally subject to a claim for the huge losses and costs that JP Morgan have incurred.”
“Liberty GTS is not one of the insurers involved in this case, but we believe it does highlight both the risks involved in toxic M&A fallout for individuals, and also the importance for major M&A players like JP Morgan of taking cover on each of their deals. Through making this claim JP Morgan is now able to open up the possibility of both recouping some of its losses, and, without having to take legal action itself, inflicting significant financial and legal consequences on the executives who they believe cheated them on the Frank deal.”