Navigating D&O Coverage When Delisting Your Company
A company that’s listed on a stock exchange will not necessarily stay that way forever. Research from Ohio State University found that Nasdaq firms were delisted at an annual rate of nearly 20%. However, just because delistings are common does mean they are not significant. Among other things, delisting your company can have serious consequences for your D&O coverage.
How Delisting Changes Your Risk Profile
Delisting can be voluntary or involuntary, and it can occur for a number of different reasons. According to Investopedia, companies are often delisted involuntarily because they fail to meet the listing standards of an exchange. For example, a company with a share price that falls under $1 per share for months may be delisted from the Nasdaq. Other reasons for delisting could include regulatory violations or failure to meet financial standards. Voluntary delisting may occur when a company decides it’s more advantageous to become privately traded.
Regardless of the cause, delisting can have a significant impact on a company’s risk profile. Notably, a company that’s been delisted may face:
-
Capital Challenges. Delisted companies tend to experience less liquidity than listed companies and may have a more challenging time raising capital as a result. This can have a negative impact on market valuation and investor confidence.
-
Trading Challenges. Investors may encounter difficulty with trading their shares once a company has delisted. This can lead to a negative experience and may result in shareholder dissatisfaction.
Both of these issues can contribute to increased litigation risk from shareholders. Class action and derivative claims may accuse the directors and officers of breaching their fiduciary duties. If such lawsuits occur, the company may have a difficult time indemnifying the directors and officers due to its reduced liquidity.
The Impact of Delisting on D&O Coverage
Delisting a company does not automatically result in termination of D&O coverage. Although D&O policies typically include a transaction clause that bars coverage following a transaction, simply delisting a company does not trigger this clause. Nevertheless, delisting has a significant impact on your company’s D&O risks, and it’s important to review your coverage to ensure that your company and its directors and officers are still adequately protected.
If you are thinking about delisting your company voluntarily, or if you company is currently being delisted or is at risk of delisting, ask the following questions to assess your coverage:
-
Are your coverage limits sufficient? Due to the increased risk of shareholder action, this is a good opportunity to assess your limits and consider whether it would be prudent to secure additional coverage.
-
Do you have sufficient Excess Side A Difference in Conditions (DIC) coverage? A delisted company may lack the liquidity necessary to indemnify its directors and officers, increasing the importance of solid DIC coverage.
-
Are you working with your insurer? Proactive communication can help ensure that you have adequate protection in place, and it can help you avoid issues when it comes time to renew your D&O policy.
Do you need helping navigating your D&O insurance needs while your company is going through delisting? NSI Insurance Group can help you review your coverage and determine whether it is sufficient for your needs. Reach out to us for more information.
