What D&O brokers should know about M&A deals
After a slight Covid-19 related dip in 2020, M&A activity is now at an unprecedented level.
As M&A activity increases, so is the likelihood that your clients may sell their business. D&O brokers should make sure clients are fully aware of the risks associated with M&A, and that they understand what really happens when they sell their business. Here are 4 things D&O brokers should know about M&A deals:
M&A means heightened exposure for directors and officers
During an M&A, directors and officers of a company will be making key decisions to approve or reject transactions in a short space of time. In doing so, they will likely disappoint some of those involved in the process and be vulnerable to claims during and after the deal.
Claims can also be brought in the usual context of a D&O claim relating to a pre-acquisition wrongful act. This can be problematic for directors and officers who may no longer control the company or its indemnification and insurance programs when the claim is being made.
Your client’s management liability policy will go into run off at the date of acquisition
All management liability policies have a trigger when a business is acquired, which generally states that cover will continue to apply but only for wrongful acts - committed or alleged - prior to the acquisition.
At the point of the acquisition, the buyer will likely have their own management liability policy and the acquired company should have cover on a go-forward basis. If it is a private equity purchase, there will usually be a new go-forward policy under a managed portfolio. These scenarios assume that the acquired company still exists.
In the case of a merger, the acquired company will no longer exist, which leaves uncertainty for the acquired company’s directors and officers. Depending on when the run off occurs, you may want to advise your client to purchase ‘run off’ or ‘tail cover’.
D&O doesn’t cover deals
D&O policies typically address three key insurance clauses for private companies, commonly known as Side A (covering the directors and officers personally), Side B (covering the company for the indemnity given to the directors and officers) and Side C (covering the company for claims against the company).
In a deal, however, the seller will give representations and warranties to the buyer about the company which they are selling. If the buyer found the company they had recently acquired was not compliant with certain laws, for example, which resulted in a breach of a seller’s representation, then this would constitute a breach of contract where coverage would be denied under a D&O policy.
You have a duty of care to your client
Although you are likely to lose your client once they’ve been acquired, you should make sure to address any potential gaps in cover.
Because of increased exposure and how a management liability policy operates during a sales process, you should prompt your client for additional information such as when the transaction is taking place, why it is happening, who the acquirer is and whether there is shareholder support.
This can pave way for discussions on run-off premiums and, more importantly, a bespoke M&A policy that will offer your client protection and peace of mind.
CFC recently launched a first-to-market transaction liability policy created specifically to protect small business sellers in M&A deals.
If you have any questions, please contact the transaction liability team at firstname.lastname@example.org.