Amid the current global macroeconomic volatility, businesses are looking to raise additional forms of capital, including “go-private” transactions. Each transaction brings new potential for director risk, which often comes at a cost. At any stage in a company’s growth cycle, financial liabilities can disrupt the balance sheet, directly impacting valuations and investor appetite.
Different types of transactions create different exposures and risks for directors. From starting a company and mergers and acquisitions (M&As), to initial public offerings (IPOs) and delisting, directors’ and officers’ (D&O) insurance can be tailored to each stage in a company’s growth. This article shares four capital-raising transactions and how companies can mitigate the associated director risk.
1. Protecting Small Private Company Directors
An initial third-party investment is often the first time a company will consider purchasing D&O insurance, especially if the investor assumes a board seat. D&O cover protects directors from potential liabilities, which frequently emanate from employment practice liability, competitor, regulatory and minority shareholder claims. D&O losses do occur with private firms. One in four private companies experience a D&O loss and 96 percent of those companies were impacted financially. Further, the average reported loss was $387,000.1
Take Action: Secure Cover for Small Private Companies
Purchasing D&O insurance is a critical step to transfer the risks and potential financial liabilities off the balance sheet and into the markets, putting the business in a stronger financial position to attract investment.
As companies continue to grow and consider going public, governance structures should be updated to maintain appropriateness and resolve issues.
2. Mitigating Directors Risk After an M&A Transaction
During company growth, there could be successive rounds of funding, or even a merger or acquisition. The composition of the board may also change.
Take Action: Reassess your Cover After an M&A Transaction
Mitigating evolving exposures through insurance is critical to manage financial risks and safeguard capital.
This process may initiate a change of control clause in the D&O policy, and new cover will need to be purchased. Departing directors may be exposed to claims made after the sale based on their past actions. For this reason, an extended reporting period for claims that arise after the transaction for wrongful acts that occurred prior to the transaction — or run-off (“tail”) coverage — should be purchased. In the UK and the U.S., this can be purchased for up to six years. In Germany, this extends as far as 12 years — aligned to the statute of limitations — which enables finality of liability for the former directors.
Understanding specific country D&O provisions is critical. In other countries, the extended reporting period may be granted automatically. For example, in France, claims made policies must grant a five-year extended reporting period.