Mergers and acquisitions (M&A) are exciting, often game-changing events in a company’s journey. Whether you are expanding your market share, acquiring talent or achieving synergy, M&A deals can shape the future of an organisation. But behind the boardroom celebrations and strategic moves lies a harsh reality: legal risks, especially for company leadership – directors and officers.
This is where D&O insurance plays a vital role. Directors and officers (D&O) insurance is designed to protect decision-makers from personal losses if they are sued for alleged wrongful acts while managing a company. During a merger or acquisition, this coverage becomes more than just helpful; it is essential. Let’s explore why this type of policy is crucial during such transitions and how it works to safeguard the interests of leadership and stakeholders.
Why is D&O insurance important during M&A?
M&A activity introduces a whirlwind of changes and uncertainties. Leaders involved in such deals can be held liable for a variety of claims. Whether it is shareholders feeling left in the dark or employees unhappy with new terms, directors and officers are often the first in line when fingers get pointed.
Here are some key reasons why D&O insurance matters:
- Increased legal scrutiny: M&A deals are scrutinised by regulators, shareholders, employees and even the public. Any oversight or miscommunication can result in a lawsuit.
- Personal liability: Directors and officers can be sued in their personal capacity for decisions made during the M&A process.
- Peace of mind: The right cover offers decision-makers the confidence to act in the company’s best interests without the constant fear of personal risk.
An M&A deal that seems smooth on the surface could involve disputes, regulatory challenges, or stakeholder disagreements. D&O insurance is a safeguard that ensures these challenges don’t personally impact leadership.
Risks faced by directors and officers during M&A deals
Every merger or acquisition is different, but the risks directors and officers face are surprisingly consistent. During the due diligence, negotiation and transition periods, they can be exposed to:
- Allegations of misrepresentation: If the deal doesn't meet expectations, shareholders or stakeholders may accuse leadership of hiding crucial facts.
- Breach of fiduciary duty: Claims may arise if it appears the board prioritised one group of shareholders over another or failed to act in the company's best interests.
- Failure to disclose information: Inadequate disclosure of company finances or potential liabilities during a sale can result in legal action.
- Disputes from minority shareholders: When smaller shareholders feel ignored or short changed, they may initiate lawsuits.
- Regulatory actions: Authorities might scrutinise the deal for compliance violations, especially in cross-border transactions.
A comprehensive D&O insurance policy ensures these personal legal risks are managed well, offering cover for defence costs and potential settlements.
How D&O insurance works during mergers and acquisitions
Understanding how D&O insurance functions during a merger & acquisition deal is essential for company leadership and stakeholders. Here's a closer look:
- Run-off cover for selling companies: When a company is acquired, its current D&O insurance typically continues for a fixed period. This 'run-off cover' ensures past actions taken by the old leadership are still protected.
- New cover for the acquiring company: The buyer's existing D&O insurance might be extended to cover newly acquired directors and officers or they might purchase additional protection.
- Policy structure: These policies usually include three main insuring agreements:
- Side A: Protects directors and officers when the company cannot indemnify them.
- Side B: Reimburses the company when it indemnifies directors and officers.
- Side C: Covers the organisation itself against securities claims.
- Claims handling: If a claim arises, the insurer investigates, offers legal defence and covers settlements within policy limits.
This insurance ensures continuity of protection. Even if leadership changes post-acquisition, any actions taken prior are still covered under the original policy.
For those dealing with acquisitions, it is also wise to evaluate other coverages such as professional liability insurance, which protects against claims of negligence or errors in services provided. Combined, these policies offer a well-rounded risk management strategy.
Conclusion
M&A deals are rarely simple. They involve complex negotiations, regulatory hurdles, and a vast array of documents. Amid all this, the personal legal exposure of directors and officers often gets overlooked. Having D&O insurance in place ensures that company leaders can perform their duties with confidence, knowing that they are protected against claims arising from decisions made in good faith.
It is not just about protecting individuals, but also preserving the reputation and financial stability of the business during transitional periods. Whether you are planning to acquire a company or prepare your organisation for sale, understanding the value of D&O insurance can help you navigate the process more securely.
Disclaimer: The information provided in this blog is for educational and informational purposes only. It is advised to verify the currency and relevance of the data and information before taking any major steps. Please read the sales brochure / policy wordings carefully for detailed information about on risk factors, terms, conditions and exclusions. ICICI Lombard is not liable for any inaccuracies or consequences resulting from the use of this outdated information.