Deal Point: A home supplies company makes a bid to acquire another home supplies company. During due diligence, the potential acquirer discovers that the target company has a tax indemnity to its former parent. The target company was spun off from a company that owned both the target and a bank. In a decision to rationalize its business, the former parent determined at the time that it would focus on the banking business and spin-off its home supplies company to its shareholders in a tax-free spin-off. The change of control in the now proposed acquisition could cause the IRS to determine that the spin-off is no longer tax-free and force the target company to perform under its indemnity.

Transactional Insurance Solution: The corporation, immediately before distributing the stock of the office supply subsidiary, causes the subsidiary to secure tax insurance. The subsidiary remains liable for any adverse tax consequences stemming from a finding that the acquisition by the competitor was pursuant to a plan, but the subsidiary’s ability to meet such a liability is assured by the tax insurance policy.