M&A Liability: Post-Closing Risk

First Quarter 2012
Corporate Board Member
by Charles Keenan

Few things are more stressful to a board that undergoing a merger or acquisition—no matter which side of the table you’re on. Not only is the future of the company riding on the outcome, there are myriad ways liability can crop up before the deal is inked. Jack Kuhn, global practice leader, Professional Lines, and chief underwriting officer for Axis Insurance, offers some perspective on staying out of the crosshairs during a corporate transaction.

Why does M&A create such liability for boards?
You have liability on both sides of the transaction, but more so with the selling company. Frequently, you’ll have constituents who take issue with the sale or merger of one company to another. Someone could think that the price isn’t fair; others might feel the structure of the deal is biased toward the other party or that the seller should have looked for further offers. In these situations, management is placed in a very difficult position because sometimes the best deal for outsiders might not be the best deal for the officers of the company, so it puts them into conflict. But management’s overall responsibility is to determine what’s in the best interest of the company.

What steps can a board can take to mitigate liability?
The biggest thing is getting the proper type of advice from outside parties, whether financial or legal. Another prudent suggestion would be to not rush into a deal, but to make sure there’s time to evaluate and assess the overall value and ramifications to all the constituents who would be involved.

How long do directors have to worry about liability after a transaction closes?
Generally, it’s around a six- to seven-year statute of limitations. In most cases, when a company is acquired, the new company typically is only responsible for the acts of that subsidiary or company from the date of the transaction going forward. So most sellers will buy a D&O liability run-off policy to protect their directors and officers for acts that occurred prior to the transaction being completed, and they will keep that out there to protect the individuals once the company is no longer in existence.

What advice would you give to boards about M&A liability protection?
Boards have to be very astute on evaluating the opportunities and ramifications a deal is going to have on all constituents. Sometimes executives think financially a deal might make sense today, but it could have other ramifications for employees and bondholders. So don’t rush into a deal. Allow the deal to develop at its own pace. And as we’ve seen recently, you might have additional bidders coming in.

The only other thing I would suggest is that boards need to make sure when they are looking at their D&O liability insurance that they understand how it’s going to work and how things would be triggered. Most important, they need to make sure their own personal assets are going to be protected.

Related Articles:
D&O Liability: Avoiding Legal Hot Spots
Say on Pay: Avoiding the Crosshairs
Seven Questions Directors Should Ask About D&O Coverage
IDL: Looking Out for No. 1
Simmering Risk: Cyber Attacks and Government Investigations

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