Hanna Beaumont FIRM, Director, Science Technology, Partners&
Safety in the lab, working from home, employment law, contract disputes, Covid... company directors are now exposed to unprecedented liability for actions and decisions they make on behalf of their business. This means direct exposure of the personal assets of your board members and key decision makers – including NEDs.
Being a director or senior officer of a business comes with advantages – driving innovation and growth, creating a legacy, leading your people; but with great power comes great responsibility – and accountability. Directors and officers are bound by complex legislation in the UK, including:
• The Companies Act 2006 – which alone lists over 200 offences for which directors may face prosecution
• The Corporate Manslaughter Act – which hit the statute books in April 2008 and allows for the prosecution of individual directors
Your directors are a key business asset, providing responsible, experienced hands to guide you, and access to “bigger picture” visioning. In life science, there are even more complex risk exposures around clinical trials, intellectual property, R&D, employment practices liability etc.
Limited liability is a misnomer. Whilst the company itself has limited legal liability, the directors of the limited company have unlimited legal liability. Both should be protected by the Directors and Officers Liability policy for any legal action or prosecution.
Directors’ and officers’ liability insurance (D&O) is now considered a crucial form of protection for all businesses, and is often a requirement before investors and board members risk their personal assets to serve your company. It can help to protect the personal assets of individuals and, crucially, to cover the costs of their defence
10 reasons life science companies need D&O insurance:
- Board members/NEDS are likely to require it.
- Investors will almost certainly require it.
- Clinical/product trials create significant risk exposures.
- Sensitive deadlines and contracts: your customers and suppliers may require it.
- Growing cyber risk exposures: directors and officers could be blamed for not ensuring that proper cybersecurity measures were taken.
- Environmental issues: leaders could be suspected of contributing to global warming, causing an environmental incident or breaching climate-related regulations.
- Regulation: life science is a highly regulated environment, subject to bodies such as MHRA, OFT, Customs & Excise, Trading Standards, ICO, the Competition Commission – to name but a few. The buck stops with directors for good governance.
- Overseas risk: high-growth businesses quickly look to overseas expansion, exposing them to legislation including EU directives and US securities laws. If directors make frequent business trips to the USA, adequate D&O coverage must be in place to provide legal representation & extradition protection should they be detained by US authorities.
- Shareholder expectations: directors could be sued for mismanagement or poor decisions.
- M&A activity: life science is a fast-moving sector – and even after a business is sold, directors may be on the hook with the purchasers for decisions made prior to the sale.
Meanwhile, all businesses are facing new and emerging risks:
- Workplace misconduct: directors and officers may face prosecution for failing to provide employees with a safe working environment.
- Lack of diversity: many organisations have already been targeted with legal action alleging that leadership has not done enough to encourage and increase diversity in the workplace.
D&O insurance claim examples
- A competitor claims a board member has released misleading statements tarnishing their reputation. They issue legal proceedings against the company and the director individually for libel damages.
- An employee accuses a director of inappropriate advances after a business dinner celebrating clinching a large contract. The employee brings the action against the director personally.
- A share price plunge follows a profits warning. It is subsequently discovered there were numerous share disposals immediately prior to the announcement – all the directors face an investigation, and the external shareholders sue for their losses.
How does D&O insurance work?
Directors’ and officers’ insurance (D&O) can provide financial protection for claims made against anyone in or acting in a managerial role for alleged wrongful acts carried out in their various roles in the workplace.
The policy reimburses directors and senior managers for legal and damages costs arising from claims made against them personally. If the company has reimbursed the directors/senior management, then the policy will indemnify the company (an excess is likely to apply).
It can also protect the business where the company itself is joined in an action under a Corporate Legal Liability extension. Cover is also provided for legal fees, professional charges and expenses incurred by an insured person who faces formal investigation by a government body into their affairs or the affairs of their company.
Directors’ liabilities at IPO
Preparing for an IPO is a key opportunity to reassess your insurance arrangements: as a public company, directors’ and officers’ liability increases significantly. You may also be restructuring your board and trying to attract new NEDs, so having the right D&O in place will be critical.
D&O risks at IPO
Your directors, the company and any selling shareholders may be liable for the particulars and information given in a prospectus prepared under listing rules and regulations. Non-disclosures, key omissions and misleading information could cause serious issues years into the future.
They will normally have to provide representations, warranties and indemnities about the prospectus, undertaking liability that’s personal, possibly joint and several, and possibly without any indemnity from the company. This liability can start from the “roadshows” stage – so it’s vital to include your insurance adviser in discussions from the outset.
Will my current D&O insurance cover IPO risks?
It’s unlikely. Most D&O policies specifically exclude the risks associated with an IPO, and changes in risk after a transaction such as a sale or merger or a change in board voting rights. Therefore you’ll probably need a new policy to service the listed company.
After you list and become a plc, your insurance will go into automatic runoff, and any decisions made thereafter need to be covered under a new policy suitable for a plc. To ringfence your risk from actions taken around the listing transaction, you have two options:
- POSI policy - a one off policy that covers the whole process and those involved in the IPO, is normally arranged on a 6 year basis with the premium being payable up front.
- Public D&O policy which includes cover for the IPO – an annually renewable policy, which includes cover for the process of the IPO and for the “new PLC” going forward.
You may also wish to purchase extended run-off cover (normally covers six years) for any risk exposures prior to the date of listing.
Lawsuits are expensive. Why protect your business but leave yourself exposed? Board members and decision makers in life science businesses need comprehensive protection as they juggle multiple risks on a daily basis. Talk to the specialist life science team at Partners& for advice on mitigating, managing and transferring those risks (via the right insurance), allowing your business to grow and prosper.
T: 01223 200650