Increase in M&A Litigation Leading to Higher Insurance Coverage Costs

Securities and Corporate Attorney Joseph MarrowBy: Joseph Marrow

The proliferation of mergers and acquisition litigation activity has led to changes in the directors and officers insurance coverage marketplace. The Wall Street Journal recently reported that in the first three quarters of 2013, 98% of acquisitions valued at $500 million or more have resulted in lawsuits (in 2007, 53% of similar transactions resulted in litigation). The magnitude of the litigation is not limited to the largest transactions. Cornerstone Research reported that in 2012 greater than 90% of acquisitions valued at $100 million or more resulted in shareholder litigation. These shareholder lawsuits generally take the form of class actions or derivative suits filed on behalf of corporations against the board of directors of the target company. The allegations in the proceedings generally concern breach of fiduciary duty claims in connection with the sales process. The lawsuits are easy to file and often get resolved expeditiously (the parties to the transactions want to close the acquisitions as quickly as possible so they are inclined to settle). The result of the lawsuits – often times, additional disclosure in proxy statements or other disclosure documents and the payment of plaintiffs’ attorneys’ fees – do not provide substantial benefit to the shareholders. The increased litigation activity has caused the insurance industry to take notice and respond. D&O underwriters have increased retentions and charged higher premiums. It may only be a matter of time before the underwriters consider limitations on the scope of coverage and the availability of such coverage for boards of directors. Companies should carefully monitor increases in their premiums and any modifications to existing coverage as policies are renewed. Given the fact that M&A activity is expected to increase in 2014, and with it resulting litigation, it will be interesting to see how the insurance industry addresses this concern.

For more information on changes in insurance coverage, please contact Joe Marrow.

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