In 2022, the Indian stock exchanges (BSE and NSE) ranked third in the world in terms of IPOs (Source: E&Y Report). When compared to other larger economies, India clearly appears to be in a bright spot here.
Are you planning to make your company public in the Indian market? If so, congratulations! It's an exciting period full of activities, for any business. You will write a prospectus, submit interim filings, send press releases, participate in stock analyst reports, and conduct roadshows for investors during the IPO process.
However, before you start popping champagne bottles and celebrating your success, make sure you have one critical ‘safety net’ at your disposal. Yes. We are talking about directors' and officers' (D&O) insurance. The IPO process exposes a company's directors' and officers' personal assets to increasing scrutiny from regulators, plaintiffs' attorneys, and the general public. Directors and Officers’ liability (D&O) insurance is essential to effectively managing this risk before and after the offering.
Confused? Don’t think too much! Things will be clearer to you after you go through this blog post. Here, we will tell you why D&O insurance is necessary for your organisation, both during and after the offering.
Let’s start with the basics then!
What is Directors and Officers Insurance?
Directors & Officers Insurance is a coverage that safeguards the possible legal liabilities of a director, board member, and other employees in a management/supervisory position in an organization ( and the organization as well) in the event that they are indicted for actions made to achieve the business objectives. This insurance protects the directors' and officers' personal assets and compensates them for legal & settlement expenses incurred as a result of such claims and litigations.
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What does Directors Liability Insurance cover?
The coverage of a typical D&O Insurance policy includes the following-
- Employer-Employee Disputes
- Kidnap & ransom Costs
- The expenditures of defending, investigating, negotiating, and settling a covered claim (including court attendance fees, lawyers' fees, bail and bond charges, and so on)
- Coverage for outside directors
- Subsidiary coverage
- Pecuniary Penalties
- Crisis Communication Costs
- Coverage for Retired Directors
- Coverage for Non-Executive Directors
- Cover for failure/negligence to monitor any claims related to professional indemnity
- Public Relations Expenses
- Cover for damage to reputation
- Severability coverage
- Emergency Costs
Risks experienced by organizations while floating IPOs and how D&O insurance can address them
Roadshow Risks
Taking a private company public entail, several new risks, and exposures. A business is particularly vulnerable to securities liability during its IPO roadshow or even in the stages leading up to it. This is the reason why D&O insurance should be in place before an offering. Such coverage is often tailored to cater to the specific needs and risks of the insured company. Some policies provide roadshow coverage as part of the base policy.
It is also important to have "failed IPO" coverage should the company be unable to complete the offering. Some insurers exclude this coverage, but others are willing to add it by endorsement to a basic D&O policy for companies.
In the event a company is not covered by D&O insurance, it should consider partnering with an insurer interested in public company exposure before submitting a preliminary prospectus. To address the nuanced coverage needs of a company, its directors and officers must seek proper advice early in the process.
Direct Listings
The existing, outstanding stock of a company is listed directly without the assistance of underwriters. The direct listing of a company involves the sale of its existing and outstanding shares without the aid of underwriters or primary or secondary offerings. Direct listings are subject to D&O liability in the following ways:
Stock Volatility –
Due to the lack of control by the underwriters and the ability of insiders to immediately sell shares after listing, there is an elevated risk of price volatility after listing. The directors and officers of a company can be held liable in such a situation.
Errors & Omissions - When it comes to a direct listing, underwriters provide less counsel and fewer safeguards, resulting in omissions and/or misrepresentations. The directors and officers of a company can be held liable in a claim resulting from such omissions and/or misrepresentations.
No lock-in period – In absence of a lock-in period, shareholders can sell shares immediately upon listing, and it is possible for them to make misstatements.
No Capital raise - Direct listing does not directly benefit the company, so plaintiffs can argue it is not in its best interest.
Post IPO Exposures
Public companies are subject to greater regulatory scrutiny and must comply with extensive securities laws designed to enhance public trust and corporate governance. Disclosure requirements can expose them to significant risks. An independent counsel should carefully review all statements made during roadshows, in prospectuses, and subsequent public disclosures of material information. After an IPO, stock underperformance is one of the biggest risks, as it can lead to lawsuits alleging mismanagement and misrepresentations in the prospectus. It is possible for a company director or officer to be held liable for material misrepresentation if it is made negligently.
An IPO may also attract the attention of regulators and other enforcement agencies, depending on the severity of the problem and the drop in stock price. This could result in concurrent investigations, which may increase risks for the directors, officers, and the organization as a whole.
The following are common post-IPO trigger events that lead to securities claims against the directors and officers of the organization:
· Accounting restatements
· Earnings falling short of projections.
· Delays in the launch of or failures to perform products or services
· Regulators investigating corporate or individual director or officer conduct.
· Investigations based on whistle-blower complaints.
· A lack of adequate disclosure regarding mergers, acquisitions, and divestitures
How to build an effective D&O program
Business owners should work with their insurance advisors before and during an IPO to develop an effective D&O policy that addresses their critical risks. Risk professionals should work with their insurance advisors to create D&O programs ahead of IPOs to minimize the time and effort. The following points may be looked into in this regard-
· Benchmarking and securities class-action claim modeling is used to assess the limits needed and the optimal program design.
· The company can be made to stand out from the competition by highlighting the positive underwriting characteristics of the company.
· Draft the prospectus and financial statements before meetings with potential insurers (including global markets).
· Select the structure of the D&O program, after proper negotiation and evaluation and considering international exposures as part of the negotiation process.
· The D&O coverage program must be prepared and presented to the company's board of directors and audit committee.
· Proper placement of ancillary coverages, such as cyber, employment practices liability, fiduciary liability, and crime, should be made.
· The primary insurer should conduct a midterm stewardship meeting with the claims and underwriting teams.
Conclusion:
Directors Liability Insurance is essential for any company looking to go public, as it provides coverage for the directors and officers of a corporation in the event of legal action from shareholders. The cost associated with these policies can be on the higher side at times, but they are necessary, given the risks that come with going public. Investing in this type of insurance will help protect your company against potential financial losses due to litigation or other claims, making it a must-have for companies planning an IPO. For the best recommendation on D&O Insurance, you may contact BimaKavach. Here, you can get the best recommendation for any insurance product in just 5 minutes.
