From the dispute between AEON Financial and SeABbank, a look back at the terms of insurance commitments and indemnity in M&A transactions

In the context of globalization and the continuous development of capital markets, mergers and acquisitions (M&A) transactions have become an important part of the development strategy of many businesses. However, these transactions often come with great risks associated with inaccurate or incomplete information from the seller's side. From the recent dispute between AEON Financial and SeABank in the acquisition of PTI Insurance Company, AEON, we will analyze the regulation of the commitment and compensation (W&I) insurance mechanism to highlight the important role of this regulation in mitigating risks for the parties as well as assessing the applicability of this provision in Vietnam.

1. What is W&I insurance?

Warranty & Indemnity insurance (W&I) is a specialized insurance product designed to protect the parties involved in an M&A transaction from financial losses arising from the breach of the warranties or indemnities stipulated in the Sale and Purchase Agreement (SPA). In an M&A transaction, the seller usually makes statements about the financial, legal, and operational status of the target company. If these claims are inaccurate or erroneous resulting in losses to the buyer, the W&I will act as a compensation payment, rather than holding the seller directly liable[1].

W&I can be structured in two main forms:

1. Buy-side insurance. This is the most common type, which protects the buyer from the risks caused by a breach of commitment from the seller's side. For example, if, after the transaction is completed, the buyer discovers that the target company has undisclosed debts, W&I will compensate for the loss.
2. Sell-side insurance. Protect the seller from claims from the buyer after the transaction is closed, helping the seller minimize liability.

W&I's coverage typically ranges from 20% to 30% of the transaction value, depending on the size and complexity of the commitments from the seller. However, the W&I policy also has specific exclusions, which means that not all representations and guarantees given in the SPA are accepted by the insurer. For example, known issues, forward-looking statements, or industry- or jurisdiction-specific risks may be excluded[2].

2. The role of W&I in M&A transactions

W&I has become an important tool in M&A transactions because of its ability to mitigate risk and support the negotiation process. The role of W&I can be analyzed from three main perspectives: protecting the buyer, supporting the seller, and facilitating negotiation.

2.1. Buyer Protection

W&I brings many practical benefits to the buyer in M&A transactions. These benefits include:

Reduce financial risk. During due diligence, not every potential problem can be detected. W&I provides an additional layer of protection, compensating the buyer if issues such as financial errors, legal disputes, or regulatory violations are discovered after the transaction is completed.

Replace the traditional mechanism. Instead of requiring the seller to hold an escrow to secure the commitment, W&I allows the buyer to transfer the risk to the insurance company. This simplifies the transaction structure and reduces dependence on the seller after the transaction is closed.

Boosts confidence. Especially in cross-border transactions or in emerging markets such as Vietnam, W&I helps buyers feel more secure when investing in environments with many legal and business uncertainties.

2.2. Seller Support

For sellers, W&I also brings significant benefits such as:

Clean exit. W&I allows sellers, especially private equity (PE) funds, to minimize post-transaction liability. Instead of having to keep a spare amount, the seller can distribute the entire profit to investors as soon as the transaction is completed.

Increase the attractiveness of trading. In competitive auction processes, offering W&I (especially in a hard-stapled model) can increase the attractiveness of the transaction to potential buyers.

Minimize disputes. By shifting the risk to the insurance company, W&I helps the seller limit the risk of a legal dispute between the buyer and the seller after the transaction, even if the transaction has been closed for a long time.

2.3. Creating favorable conditions for the parties in the transaction negotiation process

The W&I not only protects the parties but also acts as a bridge during the negotiation process.

First, W&I addresses the gap between parties in complex transactions, where the buyer often requires a high level of protection, while the seller wants to limit liability. W&I helps balance the interests of both parties, facilitating an agreement.

Second, W&I helps shorten the negotiation time between the parties. When the W&I policy is hard-stapled, the negotiation time can be significantly shortened, making the deal close more quickly.

3. Trends in W&I use in the world and in Vietnam

Worldwide, W&I has become a popular tool in M&A transactions, especially in developed markets such as North America and Europe[3]. According to a 2020 Aon report, more than 3,000 W&I insurance policies have been issued globally, with a total insurance value of tens of billions of USD. In Asia, W&I is gaining popularity in financial hubs such as Singapore and Hong Kong, where cross-border M&A transactions take place frequently[4].

In Vietnam, although there is no official data on the use of W&I, the trend of increasing M&A transactions, especially those with foreign elements, shows great potential. Sectors such as real estate, technology, and manufacturing are attracting many international investors, and these investors are often familiar with using W&I to manage risk. However, the adoption of W&I in Vietnam is still in its infancy, requiring a synchronized development of awareness, insurance markets, and legal frameworks.

4. Adaptability of W&I in Vietnam

To assess the applicability of W&I in Vietnam, three main factors need to be considered: the regulatory environment, market practices, and potential challenges.

4.1. Current legal framework

Insurance Law. The Law on Insurance Business 2022 in Vietnam does not specifically mention W&I. However, insurance companies can issue W&I in the form of property insurance or liability insurance, depending on how the policy is structured.

Contract law. The commitments and compensation in SPA are governed by the Civil Code and the Commercial Law. W&I needs to comply with Vietnam's liability and contractual regulations to ensure legality.

Regulation of M&A. Corporate Law, Investment Law and Securities Law as well as specialized laws governing M&A transactions in Vietnam. Under these regulations, W&I is not prohibited, but the insurance terms should be designed appropriately to avoid conflicts with Vietnamese law.

4.2. Market practice

• Presence of international insurers: Companies such as AIG, Chubb, and Allianz or AEGIS Vietnam are already present in Vietnam and are capable of providing W&I for M&A transactions in Vietnam[5]. However, the process of appraisal and policy issuance may be more complicated due to the peculiarities of the Vietnamese market, which does not have the habit of using these services regularly.
• Demand from investors: The rise of foreign M&A transactions, especially in strategic and complex sectors such as banking and finance, retail or pharmaceuticals, creates a growing demand for W&I. International investors often require the use of W&I as part of a risk management strategy Ro. In some disputes that arise in Vietnam, such as the case of AEON Financial canceling the contract to buy a financial company from SeABank and demanding to pay VND 4,300 billion, if the parties use W&I in the M&A transaction, it will be an optimal solution.  to help avoid the collapse of the deal that has been closed for more than a year[6].

4.3. Potential Challenges and Barriers

1. Limited awareness. W&I is still unfamiliar to many Vietnamese businesses, leading to a lack of understanding of the benefits and how to apply it. Even lawyers and law firms participating in direct consulting on M&A transactions in Vietnam do not have the habit of using this regulation and mechanism in the deals they make.
2. High cost. Insurance premiums and due diligence costs can be a major barrier, especially for small and medium-sized businesses. Therefore, in Vietnam, the parties often choose traditional mechanisms such as margin accounts, the seller retains a small part of the shares to fulfill the guarantees and guarantees if an event occurs.
3. Claims process. The legal system and claims processing process in Vietnam can be complicated and delayed, making it difficult to implement W&I. This is also a big obstacle for this regulation to apply in practice in Vietnam, not to mention that the procedure for obtaining a W&I insurance policy also takes a lot of time transactions, averaging about 30 to 45 business days[7]

Indemnity and Commitment Insurance (W&I) is an effective financial tool that helps to mitigate risks and facilitate smoother M&A transactions. In Vietnam, although W&I still faces many challenges such as limited awareness and an incomplete regulatory framework, its development potential is huge in the context of the booming M&A market. To successfully adopt W&I, businesses need to proactively improve their understanding, collaborate with experts, and ensure legal compliance. In the future, W&I promises to become an indispensable part of M&A transactions in Vietnam, especially as the market is increasingly integrated and close to world standards.