In certain circumstances insurers may provide some leeway and allow for a late claim notification to be accepted outside of the period of insurance in which it should have been notified. This may occur in situations where an extended reporting period is included in the D&O policy or alternatively where there is a continuous coverage provision in the policy.

i. acquire control of more than 50% of the maximum number of votes that might be cast at a board meeting; or

ii. hold more than 50% of the issued share capital of the Company.

• merges with another company; or
• has assets that are acquired wholly or partially by another company,

IPO’s carry different considerations and are not within all D&O underwriters’ appetite. Generally, representatives of the Board will have discussed with their broker the company’s plans vis-à-vis an IPO and you will have secured D&O cover with an insurer who is prepared to include the Prospectus/IPO document, either through charging an additional premium and/or a specific endorsement writeback. If these capital raisings are not reported, they will not be covered by the policy. See our blog post on Prospectus cover for further details on this.

Most policies’ definition of Insured/Insured Person reads as any past, present or future Director, Officer or Employee of the Company. So, D&O policies are future and past looking with respect to the definition of Insureds, which makes it easier for all parties when there are changes to the board. With that stated, it is worth noting that most declarations ask personal conduct questions about the board, so a change to an answer on the declaration would be deemed a notifiable event. For example, the declaration may ask questions about the Directors history around bankruptcy, claims history or criminal acts – if the answer changes it would have to be reported to the insurer.

• enquiries by regulators or others;
• legal claims by counterparties to the transaction or other third parties;
• allegations of impropriety;

• allegations of negligence or breaches of fiduciary duties;
• insolvency claims by creditors or liquidators against the former board of the company.

Even after the company appears not to exist anymore, the liability exposure continues for the directors & officers for the statute of limitation—7 years in Australia. In some transactions, there may even be a provision in the sale agreement requiring the entity to purchase run-off insurance as part of the sale process.

Claims-made policies are for risks where the insurers are trying to limit or control their future exposure, where the policy that is in place at the time a claim is notified is the one which will respond. Some examples are Directors & Officers, Professional Indemnity, Cyber, Environmental and Medical Malpractice.

Directors & Officers policies are on a ‘claims-made’ policy form, therefore there must be an active policy in place at the time of the claim and/or notification for that claim to be covered. If the policy has been lapsed and isn’t in place at the time the claim is made, it won’t respond to the claim, regardless of when the wrongful act occurred. This highlights the need to ensure continuity of insurance coverage at all times during the company’s life cycle, even post transaction and existence of the actual company.

Second, while an ERP is most frequently purchased when an insured changes from one claims-made insurer to another or have not been offered renewal terms by their insurer, Run-Off policies are purchased in circumstances when one insured is acquired by or merges with another.

• When a person, entity or group acquires more than 50% of the share capital of the insured.
• When a person, entity or group acquires the majority of the voting rights of the insured.
• Assumes control pursuant to written agreement with other shareholders over the majority of the voting rights of the insured;

• Assumes the right to appoint or remove the majority of the board of directors (or equivalent position) of the insured.
• Merges with another entity and the insured is not the surviving entity.

The reality of the ASX is that most listed companies on the exchange are small cap (maybe even micro-cap), while these stand-alone products are priced to an amount that is (usually) not feasible for most of these smaller companies. This is why we recommend each client explore multiple options before deciding to purchase this robust (but expensive) stand-alone insurance product.

Option 1

Purchase a stand-alone multi-year prospectus liability insurance product

Option 2

Add the prospectus liability to the annual Directors & Officers insurance policy

Self-insure

We have broken down these in detail below, but since we don’t recommend self-insuring, we will only focus on the first two options.

These policies are highly customisable and can be purchased for one year all the way up to lifetime coverage. They are comprehensive policies that can be put into the vault until they are needed. So, what is covered and included in a stand-alone prospectus liability insurance policy?

• What does it include?

Prospectus liability insurance protects your company and relevant directors/officers should a claim arise from the prospectus, or the statements made during the roadshows for the IPO. Some possible examples include a mistake in the prospectus, mismanagement, a warranty promised that you could be forced to honour, or incorrect information presented in the marketing packages or roadshows promoting the prospectus. These policies can cover investigations and critical regulatory events.

Cover can also extend to include those who may be exposed to the risks of an IPO, such as: the underwriters, controlling shareholder and even the vendor.

Resulting claims could then require legal defence or public relations consultants to help mitigate the damage, which this specialised insurance can protect you against.

• What are the limitations?

The main limitations of this product are the price and the underwriting appetite of the insurers.

Although the product is extremely comprehensive, there are many cases where the stand-alone prospectus liability insurance product isn’t feasible for the smaller junior public companies, or the insurers are not even willing to provide the option as the company is too small or not yet profitable.

• What are the benefits?

It is a way to ring-fence the exposure related to the prospectus and other documents that can be noted on the policy and does not affect the Directors & Officers insurance.

These policies can be structured to include Lifetime coverage (where the premium is paid outright, and the policy cannot then be cancelled), as compared to attaching it to the annual D&O insurance policy which is subject to renewal each year. The Corporations Act imposes personal liability on directors and other parties for misstatements or omissions in a prospectus, so this provides protection for the full statute of limitations.

Given prospectus liability insurance is specific to the risks associated with the prospectus, it is also beneficial to the many stakeholders for various reasons:

• It can be a multi-year policy to protect the stakeholders up to the statute of limitations
• It will not erode the existing D&O policy in place to cover the standard Directors & Officers exposure
• It can add other interested parties such as the issuing underwriter, advisers to the transaction and the selling and/or controlling shareholder

Many people don’t realise that the prospectus liability exposure can be added on to an existing/new Directors & Officers insurance policy. This option does have some limitations but can be both more suitable and feasible for certain clients.

• How is this done?

We typically add the coverage by way of adding a specific “writeback” to the policy.
This involves noting the actual prospectus document (after it is reviewed by the insurer) which then extends cover for that specific prospectus. Once this is done, the usual exclusions – capital raising exclusion / threshold endorsement – will not apply to the specific prospectus.

• What does it include?

The coverage is essentially the same as the stand-alone Prospectus Liability insurance option, covering the prospectus liability exposure to protect your company and relevant directors/officers should a claim arise from the prospectus, or the statements made during the road shows for the IPO. The examples are the same and include: a mistake in the prospectus, mismanagement, a warranty promised that you could be forced to honour, or incorrect information presented in the marketing packages or roadshows promoting the prospectus. These policies also can cover investigations and critical regulatory events, depending on the policy structure.

• What are the benefits?

The main benefit is that this is a feasible way to obtain insurance for prospectus liability cover.

The reality is that Prospectus Liability insurance is very expensive and many small cap companies cannot afford the large upfront cost for a 6, 7 or lifetime prospectus liability policy and, in many cases, this is the only option available for junior public companies.

In addition to this, many insurers will not offer a stand-alone long-term prospectus liability policy to smaller companies that are not showing profitability (or revenue for that matter) and are only raising smaller amounts of capital (i.e. $5,000,000). With these restraints, there is often not an alternative option when insuring a prospectus liability insurance.

• What are the limitations?

This option is an effective way to obtain insurance for the prospectus liability exposure, but it has its limitations.

This option means that the directors & officers are sharing their D&O insurance policy with the prospectus liability exposure, therefore increasing their chances of exhausting the limit in the event of a major claim. Directors & Officers policy limits are normally structured in a way that the limit does not “reset” during the policy period if it has been exhausted (the occurrence limit being the same as the aggregate limit / no reinstatement).

The other limitation derives from D&O policies being renewable on an annual basis. If there are unforeseen circumstances that cause insurers to non-renew and decline to write the policy, the board will have to self-insure both the Directors & Officers and Prospectus Liability exposure.

This option is also restrictive when it comes to flexibility and the ability to customise the policy to add additional insureds, such as underwriters, vendors and controlling shareholders.

• Taking this into account, these two policies do include similar coverages, such as:

• Damages awarded to claimants
• Legal costs incurred by you and (possibly) the claimants
• Fines and penalties assessed by regulators
• Other expenses associated with the claim

• There are also similarities in the claimants involved:

• Shareholders can issue a suit for misleading or errors & omissions in the disclosure documents or financials.
• Regulatory authorities, who can conduct investigations and initiate claims against directors and officers.
• Creditors, who, if not properly informed about the organisation’s financial position, can target directors for any unpaid debts/funds. This is usually in the event of insolvency/bankruptcy.
• Other sources such as clients, competitors, the entity or organisation, and other directors

An example of a D&O claim would be a shareholder suing the board for a misleading press release during the policy period. For a claim to hit the prospectus liability, it would have to come directly from a misleading statement in the specific prospectus.

• Copy of the Prospectus
• Completed Proposal Form

• Any additional information that explains the details of the transaction and future plans. This can include the corporate presentation, underwriting agreement, etc.

Click here.

In addition to the above, the Australian government have also announced the introduction of a Deferred Prosecution Agreement (DPA) scheme, intended to motivate companies to self-report internal bribery and corporate crime, as well as providing the Government with further measures to enforce corporate crime laws. This scheme is similar to those already implemented in the USA (2000) and UK (2012). It will most likely have a direct effect on the D&O and Crime insurance market, as the costs for penalties imposed via the DPA may not be included in current wordings for D&O and Crime policies. This proposed DPA scheme is outlined in detail in the below article.

Increased number of investigations for foreign bribery offences, resulting in further prosecutions
More Directors and Officers involved in these investigations, resulting in more D&O claims
A subsequent hardening of the D&O market due to an increase in claims, circumstances, and notifications
If you would like to find out more, the below article from Clyde & Co provides an in-depth legal perspective on these announcements:

Click here.

No matter what avenue the board of directors take in covering off the exposure, it is key to make sure all options are explored and presented so they can make an informed decision to properly cover the risk.

The area of concern and common oversight in these transactions is the protection of the old company and outgoing board of Directors, who can be subject to significant (and insurable) risks during and following the RTO. The RTO does trigger a change in control and the vast majority of D&O insurance policies have a change in control provision that reads the policy is typically null and void post transaction. To properly cover the outgoing board of Directors, companies should consider buying a 7 year run-off policy attached to the past policy to cover past acts. Many companies have been focusing on the new D&O policy for the new company/board and this leaves the outgoing board exposed.

It is important to keep the insurance broker and insurer involved throughout the transaction process so that you can secure the best possible solution for all parties involved, without paying more than you need to for the insurance program. We are always happy to provide advice on insurance programs and structures, so please feel free to contact us if you are uncertain about your past, current and future D&O coverage.