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
|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