D&O Risks and Considerations for Businesses Planning an IPO

D&O Risks and Considerations for Businesses Planning an IPO
November 15, 2024 11 mins

D&O Risks and Considerations for Businesses Planning an IPO

D&O Risks and Considerations for Businesses Planning an IPO

As private companies prepare for an IPO, they face increased risks that require directors and key leaders to adopt essential risk management strategies to ensure a smooth transition.

Key Takeaways
  1. Transitioning to a public company increases workloads, complexities and risks for board members and key leaders, which necessitates effective mitigation strategies.
  2. Public companies face enhanced scrutiny and stricter regulatory and compliance demands, including public disclosure requirements and confidentiality concerns.
  3. Obtaining the right D&O liability coverage is crucial for protecting business leaders and the company, and for facilitating a seamless IPO transition.

Transitioning from private to public is a pivotal moment for any company — and one that brings increased workloads, complexity and scrutiny. An initial public offering (IPO) also comes with myriad financial and operational challenges, ranging from public disclosure requirements and the need to maintain robust regulatory and compliance infrastructures, to concerns over confidentiality and trade secrets. These challenges expose directors and officers to risks that need effective mitigation.

Relative to 2021, the frequency of IPOs has been lower over the past five years, with higher interest rates and other macroeconomic and geopolitical factors putting the brakes on what was a robust capital market environment.1 

Many private companies continue to prepare for their IPOs, but have postponed launches pending improved market conditions. IPO activity might return to average levels after a period lower than average listings. This is particularly relevant in the financial, technology and life sciences sectors, although geopolitical and macroeconomic activity could still impede recovery.2,3

Companies should take proactive measures to prepare for their IPOs. “There's so much that goes into being a buttoned-up public company, including getting public disclosures right, which requires significant coordination across so many business and control functions,” says Nick Reider, managing director and national D&O product co-leader at Aon. “This is just something that private companies don't have to deal with to the same extent.”

Quote icon

There's so much that goes into being a buttoned-up public company, including getting public disclosures right, which requires significant coordination across so many business and control functions.

Nick Reider
D&O Product Leader— West, Financial Services Group, United States

Assess D&O Risks Before Going Public

It is essential for private companies to review and evaluate directors’ and officers’ exposures before beginning the IPO process. Significant distinctions exist between directors and officers (D&O) insurance policies for private and public companies.

Ensuring the right protection for corporate directors and key executives is paramount for a variety of financial and operational reasons. This includes meticulously evaluating D&O liability insurance coverages to safeguard business leaders. The importance of disclosures and their increased risk cannot be overstated. Reider emphasizes: “The disclosure piece of the private-to-public transition is fraught with risk — particularly given the broad IPO misstatement liability provisions under Section 11 of the U.S. Securities Act of 1933.”

D&O placement conditions for IPOs remain favorable, with competitive pricing, capacity, and terms over the last 6–12 months, even as insurers deploy capital carefully in light of persistent securities litigation risk for newly public companies. While dynamics remain competitive, outcomes are highly dependent on each company’s specific risk profile.

Reider adds that carriers are offering public company entity investigation and IPO underwriter-related coverages to differentiate themselves in the market. “The market is still relatively favorable for buyers, and this extends not only to pricing, but also to coverage. Carriers, for example, are currently more inclined to offer entity investigation and IPO underwriter coverage. That's something that public company forms typically don't have, but we're seeing it offered as a way for carriers to compete and distinguish themselves.”

Getting Risks, Terms and Policy Structure Right

When transitioning from a private to a public company, businesses should prioritize the fundamental shift in risk dynamics and focus on structuring effective de-risking strategies. Beginning at the “all hands” initial kick-off meeting and through the road show, company leaders are making decisions and representations that could create liability exposures.

IPO candidates should confirm that their current private company D&O program terms, structure and limits provide the necessary pre-IPO coverage for a seamless transition to public company status.

5 D&O Tips to Consider

  • 1. Pre-IPO Preparation

    The private company D&O policy, which almost certainly excludes public securities claims, should not exclude pre-IPO preparatory and “road show” activity.

  • 2. Failure to Launch

    Pre-IPO private company policies should contain securities exclusion carve out language for “failure to launch” claims.

  • 3. Cyber Security Disclosure

    The Securities and Exchange Commission's (SEC) new cyber security disclosure rules became effective in December 2023. Public companies are generally required to report significant cyber incidents within four business days after determining that the incident is "material." These new SEC disclosure rules may lead to a rise in securities and shareholder derivative claims. It is imperative to take measures to bridge any gaps between directors’ and officers’ policies and cyber policies for such claims.

    Additionally, the SEC's new rules mandate the disclosure of board- and management-level cyber security risk management expertise, and perceived mismanagement of cyber risks could come under scrutiny by the SEC and/or shareholders.4 Equally subject to scrutiny are corporate cyber officers, who already have been targeted by federal prosecutors, the SEC, and shareholders in matters arising from cyber incidents and associated disclosures.

  • 4. Registration Statement Risk

    D&O and registration statement risk should be considered together. The IPO ecosystem involves various components that must be structured correctly: the private company D&O form and its coverage of IPO preparation activities; and the public D&O form and its coverage with respect to the IPO itself, including the disclosures in the registration statement.

    Additionally, it is essential to consider the unique risks and other nuances inherent in an IPO, which may differ substantially from those brought about by other go-public transactions, such as direct listings and spinouts.

  • 5. Pre- and Post-IPO Allegations

    Clear policy language is important to determine how pre- and post-IPO allegations are addressed. Detailed negotiations of the “tail coverage” and “prior acts” coverage, as applicable, can provide the appropriate protections for both the former private company and new public company, and their respective boards and executives.

Public company D&O insurance can differ significantly in structure from private company D&O insurance. One key distinction is the separation of limits; in public company policies, D&O coverage generally is no longer tied to other management liability coverages, such as employment practices and fiduciary. This separation allows for more tailored protection.

Public companies often incorporate dedicated Side A difference in conditions (DIC) insurance, designed to protect individual directors and officers when the company cannot indemnify them. Including dedicated Side A/DIC limits within the D&O insurance tower is another crucial structural consideration for companies transitioning to public status.

Businesses should also evaluate whether to run off prior coverage, which has its pros and cons and requires fact-dependent analysis. IPO candidates must select a program structure that aligns with their unique risk factors and corporate philosophy.

Moreover, as companies go public, it is important to adopt a significant mindset shift. Management and board members should embrace increased and often required transparency in their decision-making processes, particularly regarding executive pay, board governance and talent evaluation. Laura Wanlass, partner and ESG practice leader of executive rewards and board advisory services at Aon, emphasizes this change. “There’s just this general shift in mindset that has to occur from private to public, where management, even the board, has to think about the increased amount of transparency in decisions that didn't have much transparency when they were private.”

This heightened scrutiny necessitates a robust public company D&O program to protect against a range of potential liabilities, serving not only as a safeguard, but also as a compelling recruitment tool for new board members. Wanlass further highlights that “when you go public, the key committees of a board must start evaluating whether the team that was successful in the private domain is successful in taking you into the public domain. So, there's the risk associated with disclosure, but really, there's this whole need to additionally reevaluate talent as part of this.”

D&O Risks and Considerations for Businesses Planning an IPO Diagram

Source: Aon

D&O Risks and Coverage Considerations During and After an IPO

D&O Risks During the IPO Process

The IPO process introduces substantial risks to the company’s balance sheet and to the personal assets of directors and officers, attracting scrutiny from external forces, including regulators, plaintiffs’ attorneys and the general public.

Companies contemplating an IPO should prioritize D&O risk considerations and engage insurance advisors early to develop a comprehensive D&O insurance plan to mitigate these exposures. Catherine Lanctôt, Canada D&O leader at Aon Risk Solutions, notes that IPO timelines can vary, with some clients purchasing D&O policies for the first time while going public:

“Occasionally, we encounter a client who never acquired a D&O policy while they were a private entity. Then, as they transition to being public, having a D&O policy is crucial in attracting the proper talent to make the board relevant to shareholders.”

D&O Coverage Considerations Post-IPO

For newly listed companies, liability risks are acute, particularly during the first three years post-IPO. There might be errors or misrepresentations in the registration statement, instances of corporate mismanagement or misinformation presented during roadshows. In a worst-case scenario, such claims could jeopardize the viability of the business. While both private and public entities benefit from D&O liability insurance, the complexities and risks associated with being a publicly traded entity necessitate more comprehensive coverage for directors and officers.

The market for D&O insurance for companies 36 months post-IPO is increasingly competitive. As companies clear this high-risk period, D&O insurers become more willing to offer coverage, often at reduced premium and/or with reduced self-insured retentions. These favorable terms reflect:

  • The statistical probability of a lawsuit being filed within the first 36 months post-listing
  • High premiums and retentions paid at IPO

5 Actions to Take Now to Prepare for an IPO

  1. Assess D&O Coverage: Ensure your board members and key leaders have adequate D&O liability insurance to protect against risks during the transition.
  2. Strengthen Corporate Governance: Establish or enhance governance structures and practices to align with public company standards, ensuring transparency and strong controls.
  3. Evaluate Financial Reporting: Prepare for rigorous financial disclosures by reviewing and enhancing your financial reporting teams and processes to meet regulatory requirements.
  4. Engage Legal Counsel Early: Involve experienced legal advisors to navigate the complexities of the IPO process and ensure compliance with applicable laws, rules and regulations.
  5. Communicate with Stakeholders: Foster open communication with employees, investors and other stakeholders about the IPO journey and its implications for the company.

The Value of Working with an Experienced Risk Advisor

Ensuring breadth of policy terms is perhaps the most critical component to a public company D&O insurance program placement. Maximizing coverage in the event of a claim is rooted in contract certainty and having the broadest and best-in-class terms and conditions.

“Clients need an insurance advisor with a sophisticated claims team that can provide real-time feedback to the broking team and use their experience to forecast issues," explains Adam Furmansky, D&O product leader with Aon in North America.

Unfortunately, inexperienced D&O brokers can be responsible for debilitating coverage gaps and exclusions. It takes an IPO-savvy and meticulous broker to obtain critical coverage enhancements. Coverage topics, such as straddle claims, key definitions and exclusions, can be the difference between accessing policy proceeds and having a claim denied.

Organizations contemplating an IPO must recognize that the transition to public status is not merely a financial milestone, but also a watershed transformation requiring a comprehensive shift in risk management and corporate governance. By prioritizing D&O considerations and engaging with their insurance broker, companies can navigate this complex landscape effectively, ensuring that their leadership is both safeguarded against potential liabilities and positioned to thrive in a publicly scrutinized environment. As the IPO landscape evolves, proactive planning and strategic risk assessment will be key to unlocking sustainable growth and shareholder value in the years to come.

Aon’s Thought Leaders
  • Tim Fletcher
    U.S. Practice Leader
  • Adam Furmansky
    D&O Product Leader — East, Financial Services Group, United States
  • Catherine Lanctot
    Canada D&O Leader, North America
  • Nick Reider
    D&O Product Leader— West, Financial Services Group, United States
  • Laura Wanlass
    Global Head of Corporate Governance and ESG Advisory, Aon.

1 US IPOs stall amid volatility as focus turns to 2025 | IFR
2 Big US and European IPOs delayed to 2025, despite strong deal backdrop – ECM Pulse EMEA/North America | ION Analytics
3 Will 2025 be a Good Year for IPOs? | avaansmedia.com
4 SEC’s cyber disclosure rules: Key considerations for the board, C-suite and risk managers | Cybersecurity Dive

General Disclaimer

This document is not intended to address any specific situation or to provide legal, regulatory, financial, or other advice. While care has been taken in the production of this document, Aon does not warrant, represent or guarantee the accuracy, adequacy, completeness or fitness for any purpose of the document or any part of it and can accept no liability for any loss incurred in any way by any person who may rely on it. Any recipient shall be responsible for the use to which it puts this document. This document has been compiled using information available to us up to its date of publication and is subject to any qualifications made in the document.

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