German legal battle puts M&A insurance under microscope


A legal fight in Germany over one of the biggest insurance claims made over an ill-fated takeover will escalate next month, in a case that is likely to be closely watched by dealmakers.

In the latest skirmish in a five-year battle, Japanese construction conglomerate Lixil has turned to a higher court in Frankfurt as it seeks to recover €270m from a consortium of 20 insurers, including AIG. The case stems from its botched €3bn acquisition in 2014 of German bathroom fittings maker Grohe.

Lixil has been pursuing legal action since 2015, when long-running accounting manipulations were discovered at a China-based subsidiary of Grohe — a Frankfurt-listed company named Joyou AG. Back then, Lixil warned its investors that Joyou’s bankruptcy would lead to $560m in losses

Lixil then turned to the AIG-led consortium, which had sold the Japanese group a warranty and indemnity policy tied to the takeover and covering up to €270m in damages from fraud and misconduct. In May, an arbitration panel ruled in favour of the insurers, who cited a clause that they said ruled out coverage for the specific type of damage.

“This is a landmark case which can have wider repercussions for the market of M&A insurance,” said Kai Wallisch, a Stuttgart-based lawyer with CMS Hasche Sigle.

So-called warranty and indemnity insurance (W & I) offers companies protection against losses stemming from inaccurate financial statements of businesses they acquire as unexpected tax liabilities. In recent years, they have become increasingly popular among corporate dealmakers in Europe, partly because private equity sellers sometimes refuse to accept any liability for any hidden misconduct at the target company.

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Lixil’s legal action has targeted AIG because the US group covers the first tranche of the €270m insurance contract.

Last year, one in five M&A transactions in Europe included a W & I insurance, up from just one in ten deals between 2010 and 2018, according to data by CMS. The acquiring company makes a claim on the insurance in 10 per cent to 20 per cent of the cases, according to KPMG.

However, the battle between Lixil, which is challenging the arbitration panel’s ruling on procedural grounds, and the consortium around AIG shows that receiving a payout from a policy can be tricky. Mr Wallisch said the fight may fuel concerns among corporate dealmakers that insurance companies might be reluctant to pay in worst case scenarios. 

Rupert Bellinghausen, a partner at Linklaters representing Lixil, said the whole process was “a nightmare from day one” as the Japanese group had to investigate the fraud at its own cost and was asked to provide “boundless volumes of data”.

“Much of this is not needed for the insurers’ coverage decision but is simply a one-sided fishing expedition with the goal of invoking all sorts of excessively interpreted exclusions and of wearing down the insured,” he added. 

AIG declined to comment.

Frankfurt’s higher regional court is set to decide the case on November 19. 

 



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