Fortis M&A Deal Terms Insight: Controlling Defense of Third Party Claims
Our newsletter provides insights, trends and analysis of Private M&A transactions
When a third party claim arises following the closing of an M&A deal, which party controls the defense and resolution of the claim can impact the cost of the claim. Funds held in escrow to cover post-closing claims are at greatest risk if the buyer has full control of the defense and can settle a claim without consent of the sellers, with the sellers obligated to pay the cost of defense and settlement. Sellers recognize this, and in analyzing data from hundreds of deals where Fortis Advisors has served as shareholder representative, over 80% of the time the seller reserves the right to participate in the defense or has a limited right to assume control of the defense.
That said, we see an interesting trend in the data:
Over the past three years, the percentage of M&A deals where the seller was able to reserve a full right to assume defense has dropped from 10% to 3%, while the percentage of deals where the seller has no right to participate in the defense has increased from 6% to 14%. Are buyers becoming more aggressive in retaining control of claims? We will follow the data and report on this further in the future.
You can explore this data further in Fortis Advisors’ Forsite™ M&A Deal Tool, our reference tool for the M&A community containing data on hundreds of M&A transactions where Fortis has served as shareholder representative.
For additional insight into the data, along with practice tips on M&A transactions, you can read further in our After Closing Series and Fortis Insights.