Planning an IPO? Pre-launch stage calls for critical D&O coverage
With IPO activity on pace to increase for the third consecutive year, (112 IPO’s completed in the first half of 2014 alone) the active market has encouraged an unprecedented number of companies, both large and small, to start planning an initial public offering. Yet as several recent cases have shown, many companies involved in the initial or “pre” IPO planning stage fail to consider the numerous liability risks and claims they face, well before they go public. Many may not realize the significance of the pre-IPO period and the exposures presented during this time, which often include organizational shifts, accounting and debt restructuring and other corporate changes. Pre-IPO activities, such as private placement agreements or pre-offering disclosures, can lead to claims from angry investors and others involved in the process if the company fails to launch its IPO.
As a result, companies planning a future IPO must secure proper Directors and Officers coverage that is structured to guard against the increased risks associated with failure to launch claims. This includes making sure there is full coverage for all pre-IPO activities, including road show and securities endorsements that will cover all pre-public exposures. Without this coverage, a company that does not complete its IPO would lack protection against any investor or breach of contract claims. In order to avoid this trap, pre-IPO companies should ensure that the D&O policy is structured in a way that offers protection in the event of a failed IPO filing.
In addition to conducting a review of their current policies, companies preparing to go public should work with skilled professionals who can guide them along the trajectory toward an IPO. It’s particularly important that smaller companies (or Emerging Growth Companies) contemplating a JOBS Act IPO work with insurance advisors who have a clear understanding of the special provisions pertaining to the Act (i.e. Say on Pay, Testing the Waters, Confidential S-1 Filings) in order to secure coverage for the public offering. Taking the time to adequately assess any D&O insurance issues during the pre-launch stage ensures that a company is protected from what could be major financial losses and/or liability claims, especially if it never makes it to Wall Street.
About the Author
Jennifer Sharkey is a Senior Vice President at William Gallagher Associates and Leader of the firm’s ExecutiveRisk Practice. She is responsible for the strategic and tactical leadership of this practice by providing consulting, marketing and negotiation expertise on Directors’ & Officers’ Liability, General Partnership Liability, Private Equity/VCAP, Fiduciary Liability, Fidelity, Kidnap/Ransom & Extortion, Employment Practices Liability and Professional Errors & Omissions Liability.