|If your insured is in acquisition, sale or merger mode, they have exposures that are suitable for framing – inside a D&O policy. Here are a few of the larger exposures that warrant your attention, and bringing up a D&O policy as a probable solution:
1. If your insured is in acquisition mode, during the due diligence process they will come into contact with sensitive information regarding the potential seller’s business processes, trade secrets, and key personnel. If the deal does not go down, and the insured continues operations in the same industry as the potential seller — or starts such operations if they were not pre-existing — the seller can allege that the insured misused its sensitive data. This misuse of data and violation of the confidentiality of the due diligence process is a classic scenario for D&O coverage. These days, some of the allegations regarding pure data could be covered under a privacy liability policy. But most privacy liability policies will exclude claims involving Ds, Os, or senior management misusing data, so chances are no coverage would pertain.
2. If your insured does not obtain 100% shareholder support for the acquisition, minority shareholders who do not like the outcome can bring suit against the Ds & Os for the management of the acquisition, or more likely the amount of money paid for the acquisition.
3. If the acquired company does not agree with the management of the acquisition, or the insured’s execution of all terms of the agreement, they can bring suit against the Ds & Os. Sometimes this would be a pure breach of contract action, but more frequently, there would be accompanying allegations of misrepresentation, possible fraud, inducement, etc., that would trigger a D&O policy.
4. If your insured is the selling company, the representations made during due diligence can come under fire if the sold company does not perform as expected.
5. Many purchase agreements require the sellers to set aside a portion of the proceeds to secure future unknown contingencies. A D&O policy can be used to fund this obligation, with the buyer’s agreement.
All of the above pertain to either side of a merger, as well as a pure sale of shares, or sale of assets.
Two logistical things to note:
1. The breach of contract exclusion in a (privately-held) D&O policy must be carefully analyzed to make sure it does not exclude claims for which we would be seeking coverage. The more narrow the wording, the more likely there is to be coverage if a claim arises from an agreement integral to the purchase contract.
2. It is possible to secure a D&O policy after the transaction takes place. Generally, more possible if the insured is the seller, than the buyer. There is a good handful of companies that will write standalone “run-off” policies. If they’re put in place at the time of acquisition, so much the better. But there is a window of opportunity of a few months where it’s reasonable for the insured (and his agent) to realize that D&O might be appropriate and to go looking for coverage. This is especially the case when the D&O is sought to secure contingency obligations.
Of course, it’s best if ALL your insureds have their D&O in place at all times — but we know that isn’t always the case. Keep trying, though!! Remember — I can supply an indication based on five simple data points: Name, location, nature of operations, number of employees, and asset size.
Although I did just learn in the school of hard knocks — please be sure to disclose if the prospect is in bankruptcy. Lack of such disclosure will lead to frustration and disappointment for all.