Chinese companies, which are increasingly de-listing from U.S. exchanges, need to review their directors’ and officers’ (D&O) liability insurance program to ensure they are sufficiently covered from the very litigation they are seeking to avoid, according to new advice issued by Marsh.
According to Marsh’s Risk Spotlight, navigating the complexities of taking a company private can expose directors and officers to increased litigation risk from disgruntled shareholders, and existing D&O liability insurance policies may not offer appropriate protection.
“Many Chinese companies are choosing to de-list from U.S. exchanges due to an aggressive shareholder litigation culture and onerous reporting requirements,” says Stella Tse, Asia Leader for Marsh’s Financial and Professional Risks Practice.
“However, during the de-listing process, shareholders frequently dispute the cash consideration offered in an effort to ‘bump up’ the price by alleging breach of fiduciary duty and insider trading, among other claims.
“It is critical that companies considering de-listing review their options early. Once the decision has been made to de-list or go private, executives need to ensure that their D&O liability insurance program provides enough protection both throughout and after the process.”
The complexity of the business, legal and regulatory environment surrounding de-listings significantly increases the litigation risk.
Most D&O liability insurance policies cease automatically on change of corporate control, usually defined as a merger, sale or any event that results in a change of over 50% of the voting power of the board. This is typically the case in taking a company private.
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