What Is Schmuck Insurance?

Schmuck insurance is a form of protection a seller may request in an M&A.¬† If the buyer sells the acquired company (or otherwise experiences some sort of liquidity event) within some defined period of time after closing for a price that exceeds some defined hurdle, the buyer is obligated to share in some way with the seller the excess of the price in that subsequent transaction over the original deal price. Schmuck insurance is often less about the money and more about protecting one’s reputation. A seller does not want to appear foolish for having sold his company for far less than it was actually worth.

A famous case involving schmuck insurance involved¬†Bill Ackman and Carl Icahn. Ackman sold his shares of Hallwood Realty to Icahn for $80 a share. It was trading at $60 a share and Ackman believed it was worth north of $100 a share. The unit purchase agreement included schmuck insurance which said if Icahn sold the shares within 3 years at a profit of 10% or higher, Ackman would be entitled to share in the sale proceeds. The case ultimately hinged on what was meant by the word “sale” (a reminder to all lawyers that even intuitive words can be ambiguous).

Photo taken at the Aggretsuko pop up in San Francisco. It’s what I imagine sellers would look like upon receiving news that they would have benefited from schmuck insurance.

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