Executives at private firms involved in acquisition deals need just as much insurance coverage against possible litigation as management at public firms, experts counseled yesterday at a Web seminar.
Speakers at the event hosted by Chicago-based insurance broker Aon Corp. discussed this and other topics for executives to consider as they push forward with mergers and acquisitions.
Carl E. Metzger, a partner in the law firm Goodwin Procter, noted that in this increasingly litigious society, the need for a privately held business to protect its officers is just as important as it is for stock corporations.
He said federal and state securities laws can come into play for privately held firms when they seek to sell, and any malfeasance that may have occurred while the company was privately held can come back to haunt the officers.
Scott P. Brumberg, senior vice president for Aon private equity and transaction solutions practice, noted that there are personal liability exposures for directors, officers and other executives when and if litigation ensues.
Company officials, he said, need to have the same indemnity from the company that executives at publicly held firms enjoy.
Executives can be pulled into any litigation against the company through no fault of their own, said Mr. Brumberg, and need insurance protection to guard their personal assets.
Many of the issues facing publicly held companies after an acquisition are being faced by privately held companies. This can include acts of fraud, misstatement or actions that can cause bankruptcy, he related.
The federal Sarbanes-Oxley financial and accounting disclosure act has extended the liability period for executives from three to five years, underscoring the need for an insurance policy to be in placed to protect the executives, pointed out Mr. Brumberg.
In structuring a policy, the parties should make sure they can sever their relationship with an individual who has committed an act of fraud or deception that can impact the deal, he advised.
Mary McDougall Duffy, managing director, Aon private equity and transaction solutions, said warranty insurance can actually serve as a useful tool in deal making.
It can also serve to make a merger candidate more appealing to a deal maker because the financial terms, should the deal sour, are more attractive and offer greater guarantees, she said.
How much insurance a company wants to purchase is up to the comfort level of the executives and officers of the company in case of a loss, she said. Generally, terms of the insurance are written broadly, except for environmental liability, which she recommended be carved out of the policy and either written separately or not at all.
Access to the conference is available for 90 days at www.aon.com/techseminars under the title "Professional Liability and Transaction Related Exposures Web Seminar for Private Equity Companies."
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