Divestitures and Change-of-Control Provisions
January 18, 2017
Most D&O policies contain provisions that affect coverage when the corporation divests of assets or when it is involved in transactions that affect the ownership or control of the entity. While language differs among insurers, most policies contain provisions that deal separately with and distinguish between
•The sale or dissolution of subsidiaries
•Mergers, consolidations, sale of assets, and changes in control of the corporation
|Sale or Dissolution of Subsidiaries
Policy conditions that deal with the sale or divestiture of a subsidiary of the corporation are often, but not always, found within a separate policy condition that addresses all divestiture and change-in-control issues. The policy may also address the sale or dissolution of subsidiaries as part of the definition of subsidiary. When a subsidiary is sold or otherwise divested, the policy will normally continue in force for the original parent corporation and for any claims that are brought against the directors and officers of the divested subsidiary. However, coverage is usually limited to claims based on wrongful acts occurring prior to the date of sale of the subsidiary and made against the insured during the policy period. No coverage is provided for wrongful acts occurring after the sale of the subsidiary. The following examples are representative of language found in many policy forms.
Found in “Conditions” Section
If before or during the Policy Period an organization ceases to be a Subsidiary, coverage with respect to such Subsidiary and its Insureds shall apply only with respect to Claims for covered Wrongful Acts taking place prior to the date such organization ceased to be a Subsidiary.
Old Republic Insurance Company, ORUG-82 (1/2008)
Found in Definition of “Subsidiary”
In the event of sale or dissolution of any Subsidiary after the inception date of this Policy, this Policy shall continue to apply to all persons who were Directors or Officers of such Subsidiary with respect to Claims first made during the Policy Period or Discovery Period for Wrongful Acts committed or allegedly committed prior to the time of sale or dissolution. However, in the event of sale, coverage shall cease as of the date of sale for Claims made against the Directors or Officers of such Subsidiary for Wrongful Acts committed or allegedly committed subsequent to the date of sale.
Great American
Mergers, Consolidation, Sale of Assets, Changes in Control
As a general rule, the D&O policy is subject to a variety of conditions and provisions that are actuated when the corporation is involved in one of the following transactions:
•Consolidation of the parent corporation with or into another entity
•Merger of the parent corporation into another entity
•Acquisition of the parent corporation by another entity
•Acquisition of substantially all of the corporation's assets by another entity
•Substantial changes in the ownership of the corporation's voting stock
•The appointment of a receiver or liquidator
•The taking over of the parent corporation by a governmental entity
•If a financial institution, the failure of the entity to continue actively making loans
Policies vary in their treatment of these activities, but where a policy does contain a relevant provision, it is normally some variation of the following.
Change in Control—The policy continues to provide coverage only for wrongful acts prior to the transaction. The policy is not subject to cancellation.