Directors leave boards for a variety of reasons, including personal issues, the company’s financial situation, M&A, etc.
While directors may have good reason to leave, doing so can leave them feeling vulnerable to future litigation. What happens if a shareholder sues or a regulator comes asking about things that occurred before the board member departed from the board?
If you are considering leaving a board, there are two steps you can take to ensure you stay protected. The first is related to your D&O insurance and the second is related to your personal indemnification agreement.
D&O Insurance
As a director, you probably know that serving on the board can make you personally liable for defense and settlement costs for claims made against you in your capacity as a director. Indemnification agreements discussed below, and good insurance is what stands between these potential exposures and having to make an out-of-pocket payment.
The good news is that under normal circumstances, directors and officers (D&O) insurance will cover directors for future lawsuits related to board service. However, there are a couple of caveats: M&A and bankruptcy scenarios. I’ll discuss how to handle those next.
Scenario 1: Mergers and Acquisitions
Remember that the company you serve will stop paying for D&O insurance after a sale. The acquiring company’s D&O insurance usually won’t respond on behalf of the selling company’s directors for claims filed post-close related to pre-close activities.
The way to prevent any gaps in coverage in an M&A situation is by ensuring that the company purchases a D&O insurance tail policy.
A tail policy covers the gap in coverage that could otherwise exist after the sale of a company. The tail holds the D&O insurance policy open for a period of time after the sale—the standard time frame is six years.
Shorter terms are available but are not recommended in part because of the way pricing works. Predictably, most claims will be brought in the first few years after a deal closes. As a result, the last few years of a tail policy are relatively inexpensive.
Also remember that there can be disputes about the actual expiration date of various statutes of limitations for a variety of reasons, making a mere two- or three-year tail policy a risky proposition.
In terms of timing, the tail is negotiated during the time between the signing and closing of the M&A deal. It becomes effective at the closing. The premium—which can range anywhere from 150% to more than 350% of the annual premium depending on the specific company being insured—must be paid no later than shortly after the deal closes.
Scenario 2: Bankruptcy
In the case of being sued after a corporation has entered bankruptcy, you would turn to the Side A portion of a D&O insurance policy. Side A is the part that responds when a company cannot indemnify its directors and responds on a first-dollar, no deductible (called a “self-insured retention” for this type of insurance) basis.
The Indemnification Agreement
The cost of D&O insurance has skyrocketed over the past several years. This has led some companies to make tough decisions about how much insurance they buy—a potential issue for directors if a company ends up being underinsured.
This is where a robust indemnification agreement can be helpful. An indemnification agreement is a contract between directors and the companies they serve. The agreement promises to advance legal fees and pay losses on your behalf if you are named in a lawsuit in your capacity as a director.
Most are drafted so that they will continue to respond even if the lawsuit arises after a director (or officer) has left the company. As with D&O insurance, the two caveats of acquisitions and bankruptcy apply.
Scenario 1: Mergers and Acquisitions
According to proprietary data from Woodruff Sawyer. (the company I work for), mergers and acquisitions come in at No. 3 on the list of reasons companies are sued.
If M&A is on the horizon, you will want to ensure the acquiring company assumes the obligations of your indemnification agreement. Typically, there is language in the agreement that functions to cause an acquiror to automatically assume the obligations of the indemnification agreement.
It is even better if, in the indemnification agreement, there is a specific promise that goes beyond automatic assumption by requiring any acquiror of the business to agree in writing to assume the company’s obligations under the indemnification agreement.
This language is particularly important if the company may be acquired after you leave the board and thus are not in a position to advocate on your own behalf.
Scenario 2: Bankruptcy
An insolvent company that files for bankruptcy is, of course, a company that doesn’t have enough assets on its balance sheet to meet the obligations of its indemnification agreements. Moreover, in bankruptcy, indemnification agreements may be regarded as executory contracts and can be rejected.
Thus, potential protection offered by an indemnification agreement is generally rendered useless in bankruptcy. This possibility underscores the importance of having D&O insurance in place.
Together, indemnification agreements and D&O insurance usually give directors the protection they need after leaving a board under normal circumstances.
In addition, independent directors can also look to purchase a personal policy for themselves, often referred to as a wealth security policy. This type of policy can respond on their behalf if their company’s indemnification agreement and D&O insurance are either insufficient or fail to respond.
Leaving the board on which they serve is often a necessary step for directors. With the right protections in place, they can leave confidently knowing they will be protected long after they take that step.
"board" - Google News
January 22, 2021 at 02:16AM
https://ift.tt/3qyxoyC
How To Protect Yourself After You Leave The Board - Forbes
"board" - Google News
https://ift.tt/2KWL1EQ
https://ift.tt/2YrjQdq
Bagikan Berita Ini
0 Response to "How To Protect Yourself After You Leave The Board - Forbes"
Post a Comment