The high-growth prospects of the emerging Asian market, together with the stability of more established Asian economies, has been the subject of growing interest in the region for some time. Although the region was hard hit by COVID-19 (much like the rest of the world), the mergers and acquisitions (M&A) market managed to rebound by the latter half of 2020, particularly in the last quarter which saw a heavy surge in deal activity.
The rising interest in Asian M&A is mirrored by swelling interest in warranties and indemnities (W&I) insurance in Asia. Traditionally, W&I activity in the Asia-Pacific was focused predominantly in Australia and New Zealand, where W&I has become a fairly common and established feature in M&A deals. While W&I activity in Asia is still in its nascency relative to other regional markets, its adoption as a strategic M&A tool has seen significant acceleration in recent years as advisors and parties become more familiar with the product.
A complex region with many variables
Given the size of the region, it is no surprise that dealmakers face various practical challenges, particularly as cross-border deals are a prominent feature of the Asia M&A market, which adds an additional layer of complexity.
As with all cross-border deals, dealmakers will need to consider and accommodate for different legal systems and a multitude of local laws. The level and certainty of enforcement of laws can also differ significantly, not just from country to country but even from state to state within countries, and it is not uncommon for the same regulatory requirements to receive different treatments or interpretations depending on the local or state authorities involved. This means guidance from reliable local counsel familiar with the nuances of the relevant legal and commercial realities is key in accurately identifying material issues and assessing the practical risks.
The multiplicity of languages and cultures in Asia is yet another feature which will need to be considered, as parties engaging in cross-border M&A will often need to obtain and work with translations of amongst others, laws, contracts, and transaction documents.
There are also certain countries in which specified categories of sale agreements may need to be entered into in the local national language.
Discussions and negotiations can become more complicated as well when there are multiple local counsels involved, each of whom will likely have different first languages, which can sometimes give rise to miscommunications.
Further, while it may be tempting for parties new to the Asian market to view Asia as a single monolithic entity, it is important to recognize that there are varying factors among the different Asian countries which will affect the risk profile for each deal. For example, countries such as Singapore or South Korea have well-established, easily accessible legal and commercial systems in place, which aids in creating stable and efficient business environments.
Conversely, some other countries are still in the process of developing these systems and so would not have the same tools and resources, such as electronic public databases or easily accessible guidance from relevant authorities. For parties engaging in deals involving a combination of such countries, it is necessary to recognize and make these distinctions in order not to inflate, or alternatively underestimate, the risks involved.
The same challenges present themselves during the underwriting process as well.
The involvement of numerous jurisdictions in a single deal, each with their own unique issues and challenges, often results in voluminous due diligence materials which underwriters will need to review, usually in just a few days as the W&I process tends to take place in a compressed timeline.
Where the due diligence materials are in foreign languages, underwriters will also need to rely on translations, whether procured by the insured or by the underwriters themselves, which can give rise to the same issues of miscommunications and misunderstandings.
Further, a level of familiarity with the political and economic landscapes, cultures and business practices of each jurisdiction is crucial for an underwriter to be able to efficiently and accurately evaluate the risks present in the specific countries, as a great deal of judgement is usually required in assessing the actual (rather than theoretical) risk involved.
Administratively, regulatory requirements pose another complication in the underwriting process due to local insurance regulations which often necessitate partnering with local insurance companies to comply with licensing requirements. As W&I is still a relatively new product in Asia, local insurers do not always have a deep knowledge of what W&I is or what it involves, meaning underwriters may need to put in a fair amount of work particularly in the initial stages to help local partners develop a better understanding of the product and how it works.
As underwriters together with their local partners are increasingly able to execute complex deals with speed and accuracy, and advisors and parties become more sophisticated with their understanding of the product, there is no doubt that the W&I market in Asia will continue to evolve, mature and grow at a significant pace.