A PE manager looking to close one of its funds was trying to sell a final portfolio company to an Irish company in the same sector. Prior to the sale, it had uncovered a fraud incident by the financial director of the company and, following an investigation, had terminated his employment (approximately six months before the sale process started). An interim financial director had been appointed.

Whilst the detected fraud was less than £50,000 the buyer was worried about the risk of further, undiscovered dishonesty or wrongdoing by the dismissed financial director.

The buyer’s due diligence team conducted forensic due diligence around the former financial director’s activities, which they shared with us. The sale of the company stalled as the buyer would only proceed if they could insure the risk of further, undiscovered wrongdoing. The cover required by the buyer included fundamental warranties in case the financial director had encumbered the shares of the company. The selling institution could not provide the warranty and indemnity recourse that the buyer required.

One insurance policy was provided: A buyer policy, with a £10m limit and providing a general level of recourse across the usual suite of warranties (including fundamental warranties) and tax indemnity. The risk of fraud by the seller and its management was not excluded by the policy.

In addition, we agreed to specific contingency cover around the potential for further undiscovered fraud by the former financial director, with a sub-limit of £2m within the W&I policy. This enhanced cover required a specific, aggregate excess of £250,000 and afforded the buyer with the protection it required, whilst at the same time enabling the transaction to proceed. The PE investor was able to exit cleanly despite the issues it had previously discovered prior to the transaction.