Executive VP & Group General Counsel, Ricardo Anzaldua heads the legal function for MetLife. His insight on the role lawyers play in M&A transactions and deals in the insurance sector.
Leaders League. What is the role of lawyers in managing the process of an M&A transaction?
Ricardo Anzaldua. Lawyers play key roles in M&A transactions since so much of the diligence surrounding them consists in putting the records of the target entity through legal review. As a result, lawyers are often the driving force behind M&A transactions in most M&A deals, especially where the target company is in a sector where intellectual property is important.
A more interesting special duty of lawyers in M&A arises from their duty as guardians of the interests of the company, as opposed to the business partners who work for the company. In M&A transactions, the distinction between the interests of business partners and those of the company can become particularly acute and give rise to tensions. Because of their interest in getting deals done, business partners at certain levels of the company may be motivated to accept contractual terms and conditions that could put the company at significant risk or create adverse precedents that disadvantage the company in future transactions. It is the job of lawyers to ensure that these considerations are escalated to sufficiently senior executives even, if the matter is particularly weighty, to the board of directors who are in a position to balance and make decisions regarding these kinds of matters.
Leaders League. What are your 'special secrets' to conduct successful M&A?
R. A. The crucial elements to success in a deal are not lawyering points, but rather the business terms; ensuring a deal that satisfies the objectives of both parties – a disposition by the seller for adequate consideration, and an acquisition by the buyer that will enable the deal to generate an adequate return on investment. Sometimes there are no terms that satisfy both of those requirements, and in those cases it’s best for both parties to walk away. In any case M&A transactions require immense doses of planning, persistence, rigor and endurance. You need to make sure you have plenty of each.
Leaders League. How does the ever-increasing regulation of the financial sector impact the acquisition strategies?
R. A. Regulation of financial entities has complicated acquisition strategies in interesting ways. For example, regulation of financial services is becoming more rigorous around the world, but it is not necessarily converging in content. As a result, acquirers need to be vigilant about differences in the regulatory environments when considering targets with operations in jurisdictions where the acquirer does not already operate.
Regulation has become more intensive, costly and onerous for banks with assets in excess of a certain value or other financial entities that for a number of reasons, including the size of their operations, have been designated by national or international regulators as posing systemic risk. Because these designations apply only to the largest entities in a given financial sector, they place the designated entity at a competitive disadvantage compared to its smaller competitors. Due to this additional regulatory burden, entities trying to avoid designation as posing systemic risk or trying to rid themselves of such designations need to be particularly cautious about any acquisition that could imperil the objective of avoiding additional regulatory burden that does not apply to competitors.
Leaders League. If any, are there specific acquisition issues in the insurance sector?
R. A. The principal issues that typically dominate insurance sector acquisitions relate to potential liabilities which are unforeseen and unforeseeable, such as the risk that the plaintiff might persuade a court to assign to the target (or its successor in interest) liabilities that are not included on the target’s balance sheet. An example might be a claim that an insured of the target, now out of existence, caused damages a court now decides the target (or the acquirer as successor in interest) should pay, whether or not they are or would be considered covered under the terms of a policy issued by the target insurer. Because of this, insurance acquisitions are often carried out as acquisitions of assets and liabilities, or a book of business - through reinsurance or “renewal rights” structures, rather than of companies - through mergers or stock sales. These transactions can be quite complex and follow many different patterns. It is really important to engage lawyers with special insurance M&A expertise when considering the acquisition of insurance-sector assets.