Due Diligence for a SPAC: It pays to do your homework

A good understanding of the risks associated with an acquisition, investment or merger is very important and can prevent a lot of grief. This also applies, of course, to mergers in which a SPAC is the leading party. A Due Diligence investigation provides an insight. In addition to the financial, fiscal and legal risks, it is also important to assess the insured and uninsured risks. Because in this respect too, the interests are significant and in-depth homework always pays.

The Due Diligence investigation focuses on a number of aspects. The activities, all entities of the company, the claims history, the risk relating to pending claims and long-term incapacity for work, Collective Agreement (CAO) obligations, commitments relating to the terms and conditions of employment and the insurance costs before and after the merger/acquisition..

What can go wrong?
Below are a number of examples of possible risks that a Due Diligence could identify:

• The insurance portfolio has not kept up with the company’s developments. For example, limits for corporate liability insurance that are too low. If the limit falls short in the event of an insured claim, the company itself would have to pay for the excess amount above the limit.
• A pending claim is not covered by the insurance and the acquiring party has to pay from its own funds. Or the claims history is so unfavourable that this will lead to higher premiums or amendment of conditions in the future. In the worst case, this can even lead to (partial) uninsurability.
• The insurance no longer offers cover following a merger/ acquisition. Or there is an absence of important insurances: there is, for example no cyber cover, whilst the company is entirely dependent on one or more systems for business operations.
• The pension scheme is integrated into the scheme of the acquiring party. The costs of this transfer and possible compensation resulting from the transfer from one pension scheme to the other can mount up significantly.

What is Due Diligence?
Due Diligence shall verify whether the insurance portfolio is consistent with the company’s risk profile and find out what risks the purchaser or investor is exposed to. The process also results in specific advice being given on how to deal with these risks. We also provide an indication of the costs of an appropriate future-proof insurance portfolio.