Shareholder Activism & D&O Insurance

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Shareholder activism & D&O insurance: A valuable but overlooked resource By Anthony Rapa, Western Region Leader, FINEX North America Claim & Legal Group

In a recent survey by Willis Towers Watson, only 55% of Entity insuring agreement (Side C) respondents considered it important to secure activist The second place to look is in the insuring agreements shareholder coverage in their directors & officers (D&O) themselves. For the vast majority of activist campaigns insurance program. As the risk of activism continues to grow that land somewhere short of litigation, triggering coverage in volume, cost and scope, it may be that many corporate will often depend on the factual particulars of the activist’s officers are simply unaware of the important role D&O campaign or overtures. While there is an element of coverage insurance can play in combating this risk. With the right policy in a standard public company D&O policy, the unique attributes language, insureds can seek protection and reimbursement of activist campaigns can create coverage issues. Take, for for costs from these activist risks under their D&O policy, example, the all too common scenario whereby an activist whether through crisis management coverage or entity directs a letter to the company (via the board). A typical entity coverage. insuring agreement (Side C cover) in most D&O policies, which provides insurance coverage for the company itself, is Crisis management coverage normally limited to “securities claims,” often defined as: The first place to look is the crisis response coverage now . . . any Claim made against an Insured alleging a violation standard in many D&O policies. This often overlooked of any federal, state, local or foreign securities law, provision can help pay for public relations specialists, crisis regulation or rule, which is: management firms and even legal counsel (thereby, so the thinking goes, avoiding potential securities class actions Brought by a security holder of the Company with down the road). Many insurers now specifically include respect to such security holder’s interest in such activism as a covered peril, though policy wording is not securities of the Company uniform. For example, some insurers tie coverage to a requirement for an unrealistically large stock drop, effectively The issue here is that many activist letters do not allege gutting the provision. Others will provide the cover subject violations of securities laws. More typically, an activist will to no retention, but sublimited well below the total available allege that the target company has underperformed financially limits. Working with your broker, these limitations can often be due to some sort of mismanagement of the business itself. overcome during placement. While it may be possible to secure policy language that defines a “securities claim” as any “claim” brought by a security holder, this can create other issues. Other policy considerations In our entity example above, this language would help overcome the threshold issue as to whether or not a Policies often define a “claim” as a “written demand for “securities claim” was asserted against the company. Many monetary damages or non-monetary relief.” It may be the other options exist in today’s insurance market, though case that an activist letter, unlike the example above, is language and applicability to your particular needs require directed at individual members of the management team careful consideration. As always, care must be taken to avoid and even alleges negligence on their part. In this instance, “coverage enhancements” which, in reality, strip coverage insurers have taken the position that an activist letter falls away and return only a small portion of it to you. short of “demanding” action, concluding instead that the letter merely “suggests” a course of conduct. Insurers have also Finally, in the event an activist campaign were to devolve argued that an activist’s call to change management or sell into litigation — a rare but not unheard of occurrence — a profitable subsidiary does not constitute a call for “non- companies should immediately look to D&O insurance as a monetary relief.” Again, such factual ambiguities, at best, lend potential source of funding. However, the possibility exists fodder to the insurer’s ability to deny or limit coverage in the that an insurer would attempt to deny coverage based on event of a claim. The foregoing are merely examples of the late claim reporting. With the shoe now on the other foot, an issues that can arise under D&O policies when attempting to insurer could argue that an activist’s initial demand was, in secure coverage for shareholder activism. Many other pitfalls fact, a “claim,” and that notice of the lawsuit was late and not exist in the areas of reporting, related claim aggregation, in conformity with the policy’s notice provision. This situation policy definitions (including “loss”) and even policy exclusions. can best be avoided by reporting activist overtures to your Fortunately, options now exist. Offered by many insurance insurer when they’re first made, as well as broadening the markets, these coverage enhancements, while not always notice provisions of your policy. Pre-claim mitigation costs, optimal, do offer real improvements. One example is the which help companies avoid a claim from ever being made, “activist shareholder extension” provided by a domestic are also of possible utility here. carrier, which amends the definition of “securities claim” to include any “claim” brought by All told, the best advice is simple enough: do not accept an off-the-shelf D&O policy form as merely good enough. The . . . a shareholder or group of shareholders who have best solution is to work with a broker who is knowledgeable filed a Schedule 13-D, and, in the good faith opinion of in the claim and coverage issues that arise in the context the [corporation]’s Chief Financial Officers, are likely of shareholder activism and who can help craft a bespoke to exercise their rights as owners through requests solution tailored to the particular needs and concerns of your for dialogues with Executives or formal shareholder organization. proposals for inclusion in an Organization’s proxy filings.

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