Plenary sessions
Wednesday, 11/11, 7:00 am - Breakfast/Panel: M&A and IPOs: Managing Personal Liability
Panelists:
- Priya Cherian Huskins, Partner and Senior Vice President, Woodruff-Sawyer & Company
- Diane Thompson, Principal, Tax, Ernst & Young
As the economy revives and IPO and M&A markets regain strength, corporate directors and officers face an elevated level of personal liability risk, according to a discussion held at the Ernst & Young Strategic Growth Forum on November 11.
The discussion centered on lawsuits by individuals such as shareholders and former employees, as well as the “three pillars of protection” against personal liability risk: good corporate governance, indemnification, and insurance.
“People are a risk in a company of any size,” said Diane Thompson , a Principal in Ernst & Young's Tax practice. This risk is magnified when companies acquire other companies and begin to blend in a new workforce and reduce costs through layoffs. C ompanies should have processes that govern hiring, firing and benefits management. But many choose instead to invest in sales and financial operations more heavily than they do in HR, which is often outsourced to third-party vendors, some of whom may not be capable of handling the complex issues at work in larger firms.
The most well-known trigger for personal liability risk occurs when a company goes public. Thompson said that among companies named in investor-related lawsuits, one-half are sued within three years of a company going public. Even private companies are vulnerable if they issue registered, but not publicly traded stock.
Newly public companies also face heightened risks associated with improper stock valuation, misdated options and misadministration.
Directors and officers can also protect themselves through indemnification, and should always try to secure a personal indemnification agreement, said Priya Cherian Huskins, a partner and Senior Vice President at insurance broker Woodruff-Sawyer & Company
“If you have an agreement, you have clarity that you can get unsecured, interest-free advances that will cover your legal fees,” said Huskins. “That's the de facto standard you should expect.”
Executives and board members should take out directors and officers (D&O) insurance. A D&O policy can backstop the company's obligation to indemnify the policyholder.
For public companies, D&O insurance is typically structured in layers, which attorneys call Sides A, B, and C. Side A protects the policyholder when indemnification is not available from the company. Side B reimburses the corporation from its indemnification obligations – useful for transferring some risk off of the corporate balance sheet so that it is not borne entirely by shareholders. Side C reimburses the company for securities claims.
Huskins says insurance brokers should help construct a policy customized to the executive's particular needs. “If the broker says ‘This policy contains all the standard terms and conditions,' go find another broker.”
Also important: even former directors and officers can be sued, and some D&O policies provide coverage. This is particularly useful when a company is acquired and former officers are held liable for corporate actions taken when they were on the board. Certain D&O policies provide protection for six years after the company is acquired.
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