Essential thoughts about D&O for your privately held technology company

Published on Wed, 01/21/2015 - 20:37
Glowing tech globe

For privately held tech companies, not exploring D&O coverage is a dangerous, high stakes game to play – one that could have devastating consequences for your directors and officers, their spouses and estates, and ultimately, your company’s survival.

The fact is, “going public” carries most of the attention around D&O risk, yet directors and officers of privately held companies have duties to their shareholders as well.  In addition, D&O’s of privately held tech companies incur executive risk in many scenarios typical of an emerging tech company, particularly around M&A.  Liability can even extend to other key employees such as your in-house legal personnel, human resources director, and other executives. Consider these typical risk scenarios you might face:

  • Shareholder claims against D&Os for loss of their valuation after the Board of Directors refuses an offer to buy a company
  • Third party allegations of intellectual property infringement
  • Creditor allegations of misrepresentation in a loan application
  • Claims of D&O negligence by government regulators relating to a data breach
  • Anti-trust allegations
  • Breach of loyalty by a joint venture company

Avoid the false “safe harbor” trap

Even if every shareholder of your privately held company is a relative or friend, that offers no safe harbor. Friends and relatives can become bitter enemies; just look at divorce law over the years.

Claiming that your director or officer was merely “acting on behalf of the corporation” won’t get you out of hot water either. The director or officer can still be held personally liable for his or her actions on behalf of the corporation.

There are other challenges that increase executive risk for privately held companies that don’t exist for their publicly held counterparts. First, most privately held companies don’t have the same resources as large, publicly held companies, so it’s not uncommon for directors and officers to make decisions without complete or accurate information. Second, many contracts and other negotiations for privately held companies are handled by an officer of the company, so that officer could face claims by any party the company contracts with – or even discusses a contractual relationship with – arising out of their contracting and negotiating activities.

Finally, don’t make the mistake of thinking you’re covered by your General Liability or Professional Liability policies. Most GL and PL policies specifically exclude coverage for directors and officers.

How do you gauge your risk?

The risk to your executives is largely determined by the stability of your company’s financials, valuation, and management team, so it’s crucial to ask the right questions to determine your risk. For example, what is the:

  • Company’s reliance on debt financing?
  • Plan for succession of management or ownership?
  • Percent of ownership in the hands of non-managers?
  • Quality of relationships with investors and creditors?
  • Level of control and oversight senior management has over the statements and representations being made by lower level personnel?
  • Company’s line of business, and is it susceptible to class action litigation?

Choose the right broker

When it’s time to talk D&O coverage, you need the right broker – and you need to ask them the right questions too. What percentage of their business is D&O? If they don’t have firsthand D&O experience with most of their clients, they probably won’t be able to deliver the kind of service you need. What percent of their D&O business is private vs. public? The two are very different, and having a broker who knows the difference is vital.

For the kind of top tier service you need for your D&O exposures, contact the technology insurance experts at Heffernan Insurance Brokers.