Mergers or acquisitions have become common today. Large companies take over or merge with smaller companies with a view to expanding their business. Whenever there is a merger or an acquisition, the directors and officers of both companies involved face a volatile situation. During mergers and acquisitions, shareholders, stakeholders and other third parties associated with the company closely monitor their actions.
The directors and officers face substantial liability from aggrieved third parties if they make any mistake in discharging their duties. These liabilities cause high financial losses for the organization as well as its directors and officers. Accordingly, to mitigate such risks, a directors and officers (D&O) liability insurance policy becomes necessary.
Let us look at some possible mistakes that directors and officers can commit during a merger or acquisition. Additionally, let us understand how the right D&O liability insurance policy can offer the right coverage.
Non-disclosure of the merger or acquisition
The process of mergers and acquisitions usually takes a long. The directors make the information public about the merger or acquisition, only after completing the process. However, third parties might sue the company and its directors and officers for not disclosing the merger on time. It is possible that the investors or stakeholders have not been able to accurately estimate the time to disclose the merger/acquisition, and this might result in a claim.
The D&O liability insurance policy can protect your company’s directors and officers against such claims. Selecting the right insurer for the D&O policy can help you in settling the claims easily.
Resisting or approving a takeover
If the directors of a company resist a hostile takeover of the company, they can get sued. Moreover, if the directors resist a takeover that their own shareholders find favorable, they may face a lawsuit. The shareholders might also file a lawsuit if they feel that the directors did not settle on an adequate takeover bid. There would be huge financial costs for defending the lawsuits in all these cases. In this case, a well-researched D&O policy would come in handy. You should always ask the insurer to share examples of settled claims to ensure you are choosing the right policy and insurer.
Mismanagement before and/or after the acquisition
After an acquisition, the buying company checks and investigates the management of the acquired company. The buying company can file a lawsuit against the company’s then-effective directors and officers if their actions led to the mismanagement of the company. Similarly, the newly appointed directors and officers can also face substantial financial liabilities, if they do not perform their duties properly leading to mismanagement.
Additional Read: What is covered under directors and officers Liability Insurance Policy?
Conclusion
Interests of several third parties matter, in the case of mergers and acquisitions. Thus, the risk of financial liabilities for directors and officers is high. Shareholders, stakeholders, suppliers, and employees of both companies involved in the merger or acquisition can file a lawsuit for wrongful acts of directors and officers. Whether the directors had done the acts before the acquisition or after the merger of the company, is of little importance. Thus, in order to protect the directors and officers as well as the organization itself from the financial consequence of a lawsuit in a merger/acquisition, a directors and officers liability insurance policy becomes helpful.
An important consideration while placing the D&O is the shareholder exclusions clause. This clause excludes claims from shareholders above a threshold ownership level. The rationale is that large shareholders control the company. So, filing a suit against their own officers should not be an option for them. By negotiating a high threshold limit with insurers while placing the D&O insurance, this issue can be addressed. Thereby, allowing the insurance to pay for the legal suits by small shareholders.
To have a smooth settlement of your D&O liability insurance policy, you must choose the right insurer. SecureNow can help you with a detailed comparison of different insurance companies offering D&O liability insurance coverage.
Visit www.securenow.in or call us at 96966 83999 and share your coverage needs. SecureNow will compile a detailed list of insurance companies with the best plans. You can then compare these and find the best insurer that matches your requirements.
