28th May 2021

The Importance of Outside Directorship Liability for Private Equity Companies


Posted by: Tom Spraggs
Tagged: Appointed Representatives, D&O Liability, Financial Institutions, Fund Managers, General Liabillity, Shareholder Protection

The Importance of Outside Directorship Liability for Private Equity Companies

 

As a director or officer serving on boards of other outside entities, it is important to ensure that there is adequate cover in place to protect you whilst you are serving in that capacity. It is equally important to understand the associated risks to ensure that there is coverage in place for such activities.

 

Directors’ & Officers’ Liability policies (D&O) are designed to protect the relevant directors and senior management of the insured entity. Where applicable, the D&O policies should include an Outside Directorship Liability (ODL) extension as standard to provide coverage for the positions these insured individuals take on the boards of outside entities.

 

These ODL extensions typically have limitations to restrict the cover offered and do not automatically extend to cover all employees, so the ODL extension would not be enforced should a current ‘non-director’ be appointed as a director of an outside entity at the behest of the insured.

 

Due to the nature of how the D&O cover is arranged, with the intention of covering subsidiaries of a parent company, the policy can be easily stretched across a group of companies and as an extension on the policy, the ODL limit also shares the limit of the overall D&O programme which can be easily exhausted if it is intended to cover numerous directors with an array of appointments. Having an adequate level of protection in place is therefore key given the policies operate on a first come, first serve basis so as not to leave any insured individuals own personal assets exposed.

 

In respect of Private Equity and Venture Capital (PE & VC) firms, depending on the strategic approach taken with portfolio companies, there is an obvious need to have the ODL extension in place. However, typical policies operate over and above any existing indemnity available at the portfolio company level – i.e. outside entities D&O programmes or agreements to indemnify directors in the event of a claim. In the absence of such indemnity, PE & VC firms find themselves exposed from the “ground up” for any claims coming against the portfolio company boards on which they sit.

 

We therefore consider it imperative for PE & VC firms seek to ensure their underlying portfolio companies have their own Directors’ and Officers’ policy in place, giving the directors that are appointed to sit on their respective boards adequate protection in that specific role as opposed to relying on the ODL extension which will encompass all positions taken by the firm’s directors and officers.

 

Furthermore, depending on how active a role the PE & VC firms take on the outside boards, there is the potential for issues in the event of a claim where it is deemed that the PE & VC firms should be liable for the actions of their portfolio companies. If this ‘corporate veil’ is pierced, having separate policies in place at both the firm and portfolio company will assist in the allocation of costs.


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