Once Sold, D&O Liability Doesn't Stop

When a company is sold in an M&A deal, directors and officers remain exposed to claims with respect to activities pre-acquisition. Therefore, D&Os have a lot to worry about when their company is being sold. To protect themselves, D&Os on target boards should try to negotiate the purchase of a run-off D&O insurance policy with the acquiring company before the sale is complete, while they still have some bargaining power left.

Run-off policies are a one time purchase which last for a set duration (typically six years) and usually cannot be cancelled or amended once purchased. Sometimes D&Os will have contractual indemnities with the companies for which they work. Generally, contractual indemnities remain silent on the purchase of run-off policies in an acquisition or insolvency context.

Liability is always a consideration for the players in a share sale, but depending on who you are, the concerns are different. Like everything, insurance comes in many shapes and sizes and D&O insurance is no different. Basically, there are four types of primary D&O insurance including:

  • Side A coverage where the insurer pays the D&O directly in instances where the company will not or cannot pay;
  • Side B coverage where the insurer reimburses the company for indemnification payments made to the D&O;
  • Side C coverage where the insurer pays the company with respect to the company’s liabilities for certain wrongful acts including securities claims or employment practices claims; and
  • Side A Excess Difference-In-Condition coverage where the insurer pays the D&O directly and operates as enhanced coverage (which can fill gaps in underlying coverage).

Keeping the types of insurance in mind, see below for a snapshot of considerations in a share sale which change, depending on who you are.


What to Worry About

What to Check

Get Protected

Acquiring Company Liability for claims regarding pre-acquisition conduct by D&Os who retire at acquisition. Is there a written  contractual indemnity that will continue post-acquisition? If there is a contractual indemnity, read it as it will likely provide for indemnification by you for claims made against former D&O for activities while they acted for the company. This means you remain liable to D&Os who retire post-acquisition.Insist on retaining Side B and C coverage in any run-off policy obtained. Side B coverage will ensure that you are reimbursed for any indemnification payments you are obligated to make to the former D&O. 
D&Os of Target Company Who Retire on Acquisition Initiation of claims against you for conduct pre-acquisition. Is there a written contractual indemnity that will continue post-acquisition? If there is a contractual indemnity, read it as it will likely continue indefinitely (including when you cease to act for the company) to cover claims for conduct while you acted as a D&O. If it does terminate, you are exposed.Demand a run-off policy be obtained (ideally with Side A Excess Difference- in-Condition coverage) as the acquiring company may not have coverage or may not have sufficient assets to satisfy any obligations. 
Target Company Responsibility for undisclosed liabilities. Acquisition agreement Resist residual obligations to the acquiring company when negotiating the acquisition agreement.No concerns with respect to any contractual indemnity that may exist or any run-off policy. 

What is the lesson to be learned for a D&O in terms of how to stay protected? Always obtain contractual indemnities with the companies you work for and make sure such contracts don’t expire when you cease to be a D&O, and, in an acquisition context, demand a run-off insurance policy be obtained which contains Side A coverage and ideally, Side A Excess Difference-In-Condition coverage.

acquisition D&O D&O insurance D&O liability Indemnification run-off policy



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