Is D& O policy required in case of merger/acquisition?

Mergers or acquisitions have become very common in today’s age when large companies take over or merge with smaller companies with a view to expand their business. Whenever there is a merger or an acquisition, the directors and officers of both the companies involved face a very volatile situation. Their actions during mergers and acquisitions are closely monitored by shareholders, stakeholders and other third parties associated with the company. If there is any mistake in discharging their duties, directors and officers face a substantial liability from the aggrieved third parties. These liabilities have the potential of causing high financial losses for the organisation as well its directors and officers. As such, a directors and officers (D & O) liability insurance policy becomes necessary.

Here are some possible mistakes which directors and officers can commit during a merger or acquisition and for which a D & O policy becomes necessary –

 

  • Non-disclosure of the merger or acquisition

 

When a company is being merged or acquired by another company, the process takes a long time. During this time, the decision to merge/acquire is usually kept confidential. However, when the information about the merger is made public, third parties might sue the company and its directors and officers for not disclosing about the merger in time. What might be the right time to disclose for the company might not be perceived so by the investors or stakeholders and that might result in a claim.

 

  • Resisting or approving a takeover

 

If the directors of a company resist a hostile takeover of the company by another company, they can be sued. Their own shareholders might file a lawsuit claiming the favourability of the takeover which is being resisted by the directors. Alternatively, if the directors approve a takeover, the shareholders might file a lawsuit claiming that the directors and officers did not settle on an adequate takeover bid. Under both these instances, there would be huge financial costs incurred on defending lawsuits and a D & O policy would come in handy.

 

  • Mismanagement pre or post acquisition

 

After the company is acquired, its management is checked and investigated by the other company. If the buying company finds that the company was mismanaged before being acquired, it can file a lawsuit against the company’s then acting directors and officers. On the other hand, after the company has been acquired, if there is any mismanagement on part of the newly appointed directors and officers, they face substantial financial liabilities if there is a lawsuit.

To put matters plainly, in case of mergers and acquisitions, the interests of several third parties are involved. Shareholders, stakeholders, suppliers and employees of both the companies involved in the merger or acquisition can file a lawsuit for wrongful acts of directors and officers. Whether the acts are being done before acquisition or after the company has been merged is of little consequence. Thus, in order to protect the directors and officers as well as the organisation itself from the financial consequence of a lawsuit in a merger/acquisition, a directors and officers liability insurance policy becomes helpful.