On March 20, 2018, the Supreme Court decided Cyan, Inc. v. Beaver County Employees Retirement Fund which has fundamentally changed the IPO market by opening the floodgates of securities class-action lawsuits against corporations in state courts. (You can read more about the March 20, 2018 ruling here.) Thanks to the Cyan ruling, securities lawsuits are no longer relegated to federal courts, which have more safeguards in place to protect defendants in securities litigation.
We’ve already seen evidence of how the Cyan ruling is increasing premium and retentions for D&O liability coverage. Any company going out with an IPO now, or in the future, will face more exposure than they did pre-Cyan.
D&O policies should be as broadly negotiated at each renewal to account for changes in litigation trends and specific rulings. Because Cyan is so new, and its repercussions still being meted out, understanding how plaintiffs are currently bringing lawsuits in IPOs is vital to crafting policy language that addresses IPO-related liabilities, and to negotiating the policy itself.
Here are just a few of the many areas where crafting state-of-the-art language in a contract is critical in mitigating risk:
Derivative Demand Investigation (DDI) coverage. When a shareholder brings a lawsuit on behalf of a company against its own directors and officers, the board of directors is required to evaluate the derivative demand and hire a law firm to conduct the derivative investigation. These investigations are costly. Brokers should add a high sub-limit for derivative demand investigations, from the standard $250,000 sub-limit to $500,000 or $1 million. Additional drop-down DDI sub-limits can be added to excess D&O layers as well.
Side A insurance. Every D&O policy has A, B and C insuring agreements. The Side A policy is solely provided to protect the personal assets of directors and officers for claims that are non-indemnifiable. The policy does not include entity coverage, so in the event of insolvency, it is unlikely a bankruptcy trustee would consider the policy and its proceeds as assets of the corporate estate. Side A D&O policies are the last backstop before the personal assets of the directors and officers, and therefore the language needs to be reviewed closely, similar to primary D&O policies.
Broad investigation coverage. In addition to formal investigation coverage, some policies now can include coverage for an informal investigation that does not meet the normal definition of a claim. For example, the SEC will often bring an informal investigation to request documents, regardless of whether there is an identifiable wrongful act.
Forum selection provision. When filing a registration statement before an IPO, companies should talk to their attorneys about including a “forum selection provision” that pre-selects certain states in which a case can be brought. Selecting a federal forum, for example, would keep plaintiffs from shopping their cases in more liberal state courts like California. But be warned. Because the legal repercussions of Cyan are so new, a forum selection provision is still untested. Whether it would hold up in court is uncertain at this point.
Given the difficulties of defending securities claims in multiple state courts, it’s critical for directors and officers to make sure they work with insurance brokers who can analyze and strategically assimilate lessons learned from the current litigation landscape to protect against the exposure associated with Cyan.
This is the second and final installment. To read part one in this blog series, click here. To connect with the author by email, click here.