Main D&O Assurance Considerations for SAVS and SAVS Targets | Orrick, Herrington & Sutcliffe LLP
Litigation arising from the skyrocketing increase in Special Purpose Acquisition Company (SPAC) transactions means that directors and officers (D&O) insurance coverage needs special attention. Unlike a traditional IPO, where the private company converts its existing D&O program to a public company program, in a PSPC combination there are three main insurance programs involved: PSPC, Target, and Upcoming Public Company. . Coordination and understanding of coverage is crucial. The main coverage issues for SPACs, target companies and their respective directors and officers are as follows:
- What D&O insurance programs are at stake?
- Does the target’s D&O policy provide adequate coverage?
- Should the target’s private D&O policy be put into run-off?
- What are the coverage options for the SPAC (and the sponsor)?
- Will the public company D&O policy cover prior acts?
It is essential to review your coverage and options. Below we have described our knowledge gained from advising SPACs and target companies on coverage to help mitigate risk.
1. What D&O insurance programs are involved?
There are three main programs: (i) the D&O coverage of the public company of the SAVS, (ii) the D&O coverage of the private company of the target company and (iii) the D&O coverage of the future public company. (Each of these programs may also have side A excess coverage.)
- SPAC: The SPAC likely obtains public company D&O coverage for the company and its directors and officers when it goes public. Protection against claims resulting from its efforts to identify and merge with a target company, the typical coverage period is two years and is generally put into liquidation upon closing of the de-PSPC transaction. Since this is a D&O cover for a public company, it typically has three “sides”: A side cover for individual directors and officers in the event the company is unable or unwilling not compensate individuals; Side B reimbursement cover for the company for its compensation of directors and officers; and side C coverage for the company against securities claims. In addition, this policy must include coverage for the sponsor SPAC LLC and its directors.
- Target company: The target likely has a private company D&O policy that can cover a range of alleged wrongful acts committed by the company, but generally excludes coverage of securities claims. This exclusion often appears without any change in policies that were obtained before the company considered a de-PSPC transaction.
- Listed company: In preparation for the de-PSPC transaction, the company will obtain public company D&O insurance to start on the first day of trading. This coverage is often the typical D&O insurance of a public company, providing coverage to the company for title claims only. Premiums for these policies have increased dramatically, with primary insurers demanding much higher self-insured retentions. A key coverage term to address before binding is prior acts coverage i.e. D&O insurance will apply to claims based on alleged wrongdoing by the target company and / or PSPC before the IPO.
These policies cover different insureds and undoubtedly different risks. In the event of a claim, including a securities lawsuit alleging inaccuracies prior to the business combination, all three programs may provide coverage.
2. Does the target’s D&O policy provide adequate coverage?
Many targets PSPC do not have a strong D&O assurance program, especially with regards to overall coverage limits and substantial coverage, compared to a public company or late stage private company going public. Some have basic, out-of-the-box D&O policies first obtained at an early stage of development, but we often find that they are not updated as a company’s transactional plans and goals evolve. . Examining the scope of the securities exclusions in coverage is crucial, but a review of all terms and conditions, including defense coverage, is essential. Side A purchase coverage for directors and officers may also be considered.
A private company’s D&O insurance should cover the private company and directors and officers against claims alleging pre-IPO misconduct, including allegations of complicity in misrepresentation made by PSPC to its investors. Claims made after being made public alleging misconduct when a private company would be covered if liquidation cover is purchased (discussed below). When a target company is considering a de-SPAC transaction, it is imperative that it review its existing coverage to see if it needs to be changed.
3. Should the target’s private D&O policy be put into run-off?
D&O insurance is “claims” coverage, meaning that it only applies to third party claims (eg, civil lawsuits) made during the policy period, and policies generally provide that the coverage ceases in the event of a change of control. Therefore, the private company’s D&O policy will need to be wound up to provide coverage after it has been made public for claims alleging wrongdoing that occurred prior to the transaction. We most often see this “tail” coverage come into play when claims allege that misrepresentation was made by the target company and its officers prior to the transaction. And as shown below, if the upcoming public company D&O insurance has an exclusion of prior acts, without tail coverage, there may not be a policy in place to cover the previous acts. claims of alleged inaccuracies before going public.
4. What are the Coverage options for SPAC (and sponsor)?
In view of the increased cost of premiums and the continued high level of full coverage for directors and officers of the public company (with the three components of coverage described above), some SPACs are considering purchasing coverage from the public company component. A only to protect their individual directors or officers in the event that the SPAC is unable to compensate them. This coverage can be run-off during the de-SPAC transaction. This option may make sense for PSPC and its directors and officers, but policyholders should also recognize the risk of not having A&D insurance to defend the company against a securities lawsuit filed with de-PSPC. With either type of A&D insurance, the SPAC should review the definition of insured person before initiating coverage.
The SPAC sponsor should also carefully consider D&O coverage, including whether it is covered by the SPAC policy. Securities lawsuits increasingly identify the SPAC sponsor as the defendant. In addition to applying for coverage under the policy issued to the SPAC, these sponsoring entities should consider whether their parent company’s D&A insurance can provide coverage.
5. Will the public company D&O policy cover prior acts?
With the increase in the number of securities lawsuits against companies made public through de-PSPC transactions, a careful assessment of D&O policies is necessary to determine if you are covered for claims arising from prior alleged wrongdoing, including alleged misrepresentation by PSPC, the target company, and their respective officers prior to the merger. Some insurers may offer full coverage for prior acts, while others may require some form of exclusion. In such a situation, you can and should work with your legal counsel and broker to negotiate with the insurer the terms of an exclusion. When the time comes, it’s not hard to imagine an insurer arguing that an exclusion of prior acts prohibits coverage of a securities lawsuit because it includes allegations of alleged misrepresentation prior to de-SPAC. .
D&O coverage is evolving in line with the increase in disputes related to SAVS. Companies, directors and officers would benefit from careful consideration of existing D&O coverage and consideration of the wording of the proposed policy before binding.