Ready To IPO? Ringfencing The Risk
The number of IPOs in Europe increased in 2017 when compared to 2016 levels, with 348 listing last year.
Those transactions will have created a significant change for each of those issuing companies, bringing opportunities for growth but also a higher level of regulatory and investor scrutiny.
For the IPO of a non-US company, there are three key insurance considerations that should be taken into account to protect the board, the company, and pre-IPO investors from these new exposures.
Run-off of Existing D&O Cover
The company can isolate its pre-IPO liabilities by running-off the existing directors and officers (D&O) liability insurance policy for a period that ties in with the statute of limitations of the relevant jurisdiction, for example, six years in the UK.
Run-off cover provides comfort to the directors that their ongoing D&O cover will not be diluted by claims that relate to pre-IPO liabilities, and vice versa.
A company should consider ring-fencing the liabilities arising out of the IPO by putting in place a public offering of securities insurance (POSI) policy, also known as prospectus liability insurance.
A good quality POSI policy should be drafted widely and negotiated so that all matters relating to the offering are covered, that is, not just the prospectus itself. The POSI policy should capture any liabilities relating to the roadshow, any management decisions leading up to the offering, and any breach of the indemnities given by the directors in the underwriting agreement (or equivalent).
A POSI policy can be extended to include cover for the controlling and/or selling shareholders, which is one of the main reasons why POSI is particularly popular among private equity-backed companies.
The D&O insurance can then be left to respond to the day-to-day risks faced by the directors.
The company should use the IPO as an opportunity to stress test its D&O cover to ensure that the limits and extent of cover are aligned to the size and nature of the risks that the company will face as a listed company.
Putting insurance on the agenda at the early stages of an IPO process not only ensures different structuring options are evaluated but allows for the insurance to be packaged in such a way that it can be used to attract talent to the board.