For independent agents who specialize in private company directors and officers (D&O), the expectation that mergers and acquisitions (M&A) will continue to be active for the foreseeable future is good news. When clients are acquiring other firms or vice versa, these transactions present great opportunities for agents to do what they do best: provide valuable counsel.
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Understanding the 2019 M&A marketplace
Corporations and private equity firms focused on M&A activity foresee acceleration in 2019, further extending several years of record M&A activity. 76 percent of M&A executives at U.S.-headquartered corporations and 87 percent of M&A leaders at domestic private equity firms expect the number of deals their organizations will close over the next year to increase.1
Additionally, almost one third of corporate respondents anticipate significant growth in deal activity, up from about a quarter a year earlier. But activity isn’t the only aspect we can expect to increase — there is a strong belief that the size of these transactions will be larger than those brokered last year as well.
Opportunity for independent agents
These situations present an opportunity for independent agents to bring value to their customers by fully understanding the impact an acquisition may have on existing D&O coverage, and ensuring appropriate coverage is in place post-acquisition. With a number of interested parties and various business and personal liability exposures, independent agents who understand these potential exposures will be better equipped to negotiate appropriate coverage terms as far in advance of the transactions as possible.
D&O underwriters can play a valuable role in the success of these transactions. Agents who work closely with their D&O underwriters can help ensure they maintain appropriate coverage by examining the terms and conditions of the transactions. Reviewing and understanding companies’ transactional agreements, or purchase sale agreements, is critical.
Agents should work to understand a few crucial elements: whether the transaction is an asset sale only or an equity purchase, the impact on ownership and shareholders, the estimated transaction date, outside valuations of the company being acquired, and any planned management terminations or employee layoffs, among others. One of the best ways to understand these elements is to communicate with their customers’ financial experts, lawyers and acquisition advisers.
What to consider
Not all D&O policy forms are the same, which creates another layer of complexity. Depending on the form, the specific “change in control” provisions may differ. It is essential that independent agents and their underwriters agree on the details of the transactions and how the policy terms apply. For the majority of D&O policies, “change in control” provisions dictate that when a change in control has occurred, the policy automatically converts into a runoff policy. This provides coverage for claims arising from wrongful acts that occurred prior to the change in control, but no coverage for acts that occurred after the change in control. If a “change in control” provision is triggered, D&O coverage is essential to protect the newly formed company going forward.
Working through the transition
Naturally, the acquiring company will obtain its own insurance for all acts that occur after it has taken control. It is important to note when an agent’s customer acquires a company, it is acquiring not only its assets, but also its liabilities. Some liabilities may not be fully discovered at the time of acquisition, so they may not come to light for some time. In addition, runoff must be adequate for the prior activities of the companies and their executives.
For example, investors may be disgruntled with the way previous directors and officers ran the business. Third-party vendors may feel they did not receive fair treatment under previous contracts or a competitor may claim infringement of intellectual property rights. In order to protect itself from these unseen liabilities, the acquiring company will often require the selling company to purchase additional runoff coverage for a set period, such as one to five years, to protect the directors and officers for acts taken when they were a part of the selling company. Additional runoff coverage can often be negotiated and purchased from the incumbent carrier, or another carrier may agree to provide runoff.
M&A are part of the normal life cycle for many private companies. Working closely with D&O underwriters will help ensure thorough protection of company assets and individuals. When independent agents’ customers are preparing for acquisitions, it is an excellent opportunity to provide expert risk management services and comprehensive protection for the selling or acquiring companies.
1Deloitte 2019 M&A trends report
About the author
Helen Ryan Saviano currently serves as The Hanover’s president of management liability. With more than 25 years of industry experience, she is a proven leader with expertise in organic, ground-up business development, resulting in profitable returns on investment and revenue growth.