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Being Public: Properly insuring capital market liability for listed companies

"As an in-house expert for risk management and insurance issues, the requirements of the Executive Board and Supervisory Board are complex. As a former risk and insurance manager at DAX40 companies, I know them well."

Florian Eckstein
Managing Partner, Risk Partners GmbH

Our special services for listed companies:

Insurance Due Diligence

Insurance Due Diligence of the D&O insurance conditions for adequate coverage of all capital market risks for management and company

Foreign Filer
(US-Listed)

For foreign filers (US-listed) listed on the NASDAQ or New York Stock Exchange: Special exposure analysis and coaching on capital markets liability under US and EU law

Rent-an-Insurance Manager

Rent-an-Insurance-Manager: We place identified and insurable risks on the global insurance markets for you in the best possible way. However, we know that this does not always solve all your challenges.

Selected developments in capital market liability

Listing on the stock exchange imposes a number of additional obligations on the companies concerned, but also on the management in its responsibility as a representative of the company. This also has a corresponding effect on the liability of the company and also on the personal liability of the managers. The extended area of responsibility is also referred to as consequential obligations under capital market law. Subsequent obligations under capital market law are all obligations of a company that may arise as a result of the issue and trading of securities (e.g. shares, but also bonds or proxy certificates) on stock exchange and over-the-counter capital markets. These include, in particular, disclosure obligations (reporting obligations) and ongoing market conduct rules:

a) With regard to disclosure requirements, IFRS consolidated financial statements (with management report, NFE, annex) must now be prepared in addition to the HGB financial statements and published on the website and in the Federal Gazette shortly after the balance sheet date. Also new is the preparation of a half-yearly financial report, with a condensed management report and annex, which must be published on the website and in the Federal Gazette 60 days after the balance sheet date.

  • Possible risk: delays or incorrect reporting could occur here if, for example, the half-year financial report is not completed until September or the annex are incomplete/incorrect.

b) The following obligations under the Market Abuse Regulation (MAR), among others, must be complied with and fulfilled:

  1. Ad hoc publicity
  2. Documentation and notification for deferral of ad hoc publicity
  3. Maintenance of insider register and proof to BaFin if required
  4. Instruction of committees, managers, potential insiders
  5. Notification of director dealings(transactions by managers (in particular Art. 19 MAR))
  6. Information in the event of significant events (creditors' meeting/amendment of the bond conditions, etc.)

Who is affected by the Market Abuse Regulation (MAR)?

The MAR (Market Abuse Regulation) was adopted by the European Union in order to create a common level of transparency and investor protection in the capital markets of all member states of the European Union.

Subject to MAR:

  • Issuers in regulated markets (e.g. Prime Standard and General Standard in Frankfurt)
  • Issuers on automated multilateral trading facilities (MTFs) operated by market operators and investment firms
  • Issuers on organized trading facilities (OTFs)

This includes all German OTC segments, including the quality segments such as Scale and m:access (Munich Stock Exchange). In addition to shares, other financial instruments such as bonds, options, ETFs, CFDs, credit default swaps and forward transactions are also included in the scope of application.

Stricter sanctions under MAR - What are the specific risks?

Possible risk: you could, for example, fail to fulfill these obligations by the company or the management:

  • Keeping no or incorrect insider lists
  • Forgetting an ad hoc notification or not properly documenting the deferral
  • trade bonds or own shares and forget to report this to BaFin and Investor Relations
  • Ask us about our special securities trading cover as part of D&O insurance for insured persons, management board and supervisory board as well as a balance sheet protection clause for possible direct claims by investors and shareholders. We provide individual advice after analyzing your market cap, stock exchange and shareholder structure.

In addition to the new obligations, possible sanctions and fines in the event of a breach of disclosure obligations and insider trading law have also been drastically increased. Even an attempt to manipulate the market is now considered a criminal offense.

In addition, the "naming and shaming" practice has created a further deterrent effect. All sanctions imposed are made publicly accessible for five years on the websites of the respective state authorities (e.g. BaFin), stating the facts of the case and the identity of the persons concerned.

Violations of market manipulation law and insider trading bans

Penalties for natural persons
Up to EUR 5,000,000
Penalties for legal entities
Up to EUR 5,000,000
or 15 % of group turnover

Violations against the handling of insider information

Penalties for natural persons
Up to EUR 1,000,000
Penalties for legal entities
Up to EUR 2,500,000
or 2 % of group turnover

Violations of obligations regarding insider lists, proprietary trading by executives, trading bans for executives

Penalties for natural persons
Up to EUR 500,000
Penalties for legal entities
Up to EUR 1,000,000

How can the management board, supervisory board and company adequately protect themselves against the additional liability risks arising from the stock exchange listing or capital market orientation?

Due to the additional legal and regulatory requirements - as partially outlined above - this also increases the risk of incorrectly or negligently disregarding and breaching one of the aforementioned obligations. Sensitive penalties often apply to natural persons (in particular the management board and supervisory board) as well as the legal entity (company).

In D&O insurance, the increased risk must therefore also bereported to the insurer as part of the so-called "obligations to increase the risk". The "trigger" of the increase in risk in standard D&O policies is often defined as "the first public offering of securities, primary shares or secondary shares as part of an initial public offering (IPO) or secondary public offering (SPO) and the takeover or offer to take over shares as part of a share exchange, a squeeze-out procedure or comparable measures."

There is therefore no automatic insurance cover under D&O insurance for this new risk area of the capital market and the inclusion should be specifically checked by an experienced insurance broker and negotiated with appropriate extensions to the terms and conditions. Not all insurers in Germany insure the D&O risk of a listed company, so there can often be nasty surprises if the insurer's policy prohibits the continuation of the D&O contract and a replacement has to be found under pressure. You should therefore already check in the IPO readiness check whether your D&O is also prepared to offer protection in the context of a stock market listing. The so-called Side C cover within the D&O policy is a necessary extension in order to also cover capital market follow-up obligations and the defense against and indemnification of securities trading claims, such as lawsuits by investors, shareholders, securities class actions and the Capital Model Proceedings Act (KapMuG). Below we explain the basic structure of a D&O insurance policy and how these components interact to provide maximum protection.

Understanding the structure of D&O insurance:

D&O insurance is basically structured in three modules (Side A+B+C) and can be taken out and extended on a modular basis, depending on the individual risk profile of the company and the managers involved.

Side ABC policies are generally chosen by listed companies, as this is the established standard for listed companies and provides the best possible cover for all areas of risk for the insured persons, as well as protecting the company's assets.

For cost reasons, however, pure Side A cover can also be taken out for the benefit of the primary interest of the insured persons, or at least from a certain sum insured, the limited scope can now be considered purely for the acting persons. (e.g. first EUR 25 million sum insured with full Side ABC cover and then a further EUR 25 million sum insured only for Side A for extended protection of the private assets of the insured persons; total sum insured EUR 50 million).

Manager liability - How to cover your ass! 

Our Managing Director Florian was a guest on the podcast of the life science specialists from Pates and gives valuable tips on the topic of "manager liability".

Building block
Description
Who is insured?
What is covered?
Side A
...pays on behalf of the insured person the loss that is not compensated due to a claim against the insured person
Natural persons (management board, supervisory board, managing director, senior executives, etc.)
Private assets of natural persons from their personal liability
Side B
...pays the loss on behalf of the company that is compensated on the basis of a claim against the insured person. (Indemnification / Company Reimbursement)
Legal entity (company)
Balance sheet protection of the company
Side C
...pays on behalf of the company for damages caused by a direct claim against the company. Outside the USA and in the case of listed companies in the USA (e.g. foreign filers), this includes the defense and indemnification of securities trading claims, such as lawsuits by investors, shareholders, securities class actions, or in Germany under the Capital Markets Model Case Act (KapMuG).
Legal entity (company)
Balance sheet protection of the company in the context of securities trading claims)

Not sure whether your D&O insurance also offers comprehensive protection, e.g. for capital market follow-up obligations and the defense and indemnification of securities trading claims, such as lawsuits by investors, shareholders, securities class actions, Capital Markets Model Case Act(KapMuG)? Make an appointment here for a non-binding and free check of your insurance cover for your capital market liability under D&O insurance. 

For foreign filers listed on the NASDAQ or New York Stock Exchange, for example:

Managers whose company is listed on a US stock exchange such as the NASDAQ or New York Stock Exchange (NYSE) bear a particularly high risk.

What is civil liability under Section 11 of the US Securities Act 1933?

Section 11(a) and (b) of the US Securities Act 1933 provide for strict liability (tort liability ) for issuers who make material misstatements, misrepresentations or omissions of information in the issuance of securities in connection with the disclosure requirements of a public offering of shares, such as an IPO or SPO. Essentially, liability under Section 11 covers errors relating to the prospectus, a private placement memorandum, a registration statement, but also general disclosures, e.g. during a road show, investor conference, etc.

What are the requirements for tort liability under Section 11?

To be liable for a Section 11 violation, the issuer must make a material misstatement or omission of information in the transaction. An individual, such as the directors, may be held liable if the final registration statement (filing documents with the SEC) contains the following:

  • Untrue statements of material facts;
  • omits any material fact required by any law or governmental regulation; or
  • omits information that renders the information provided materially misleading.

The special feature of this strict liability is that the plaintiff does not have to demonstrate or prove that he relied on the statement. It is sufficient to prove that the information was incorrect or misleading. The limitation is that the purchaser of the shares must not have known at the time of purchase that the information was incorrect or misleading. Finally, the securities purchased by the plaintiff must be traceable to the relevant registration statement or disclosure document. This requirement is easy to meet in an initial public offering, but may be difficult in subsequent purchases of shares issued in private offerings.

bear_market

Who is potentially liable?

The Issuer is potentially liable under Section 11. In addition, Section 15 makes any person or company controlling an Issuer potentially liable. This provision provides for joint and several liability for the controlling person or company in accordance with the principles of agency. Liability also extends to those who sign their name to confirm the truthfulness of the information (signatory/representative). This generally leads to potential liability for company directors (management board and supervisory board), underwriters and others involved in the preparation of the registration statement or prospectus. Any signatory can rely on their duty of care, although it will be difficult for a CEO and CFO who are insiders to raise this defense. The due diligence defense relates to the effort and care the signatory exercised in verifying the misstatements or omissions. Section 11(e) provides for rescission of the transaction (together with interest) or compensation for damages (loss) suffered as a result of the subsequent sale of the securities.

How high is your "exposure" as a board member of a foreign filer? - Calculation of the Securities Class Action Exposure (SCA) Exposure 

The special liability situation and public scrutiny of securities class actions does have one advantage - namely a high level of transparency of the lawsuits and their outcome. In contrast to many other jurisdictions, the data on securities class actions (SCA) is published in the USA. It is therefore very easy to analyze,

  • which sectors are particularly affected by SCAs,
  • Causes of the complaints,
  • A plaintiff's prospects of success ("dismal ratio"),
  • Settlement data and liability for damages regarding the amount of a settlement concluded

Sidenote for our German IPO mandates: we also try to provide you with a sound basis for decision-making with benchmarks and evaluations from our claims database.

Securities Class Action (SCA)
Exposure calculation
Scenario
50 % price slide
Share price
Market Cap
Starting course
$ 15.50
$ 77.500.000
Price slide to
$ 7.75
$ 38.750.000
Total ADS outstanding
5.000.000
Less "friendly" shares
(1.500.000)
Potential "critical" shares
3.500.000
Price slide per share
$7.75
Potential securities class
Action exposure
$ 27.125.000
50 % percentile
75 % percentile
85 % percentile
Potential SCA exposure
$27.125.000
Comparison ratio (SCA)
18,40 %
34,70 %
51,30 %
Estimated comparative value
$ 4.991.000
$ 9.412.375
$ 13.915.125
Expected SCA
Defense costs
$ 2.000.000
$ 3.000.000
$ 4.000.000
Total SCA potential
(estimated)
$ 7.000.000
$ 12.500.000
$ 18.000.000
Budget for
"linked" claims
$ 3.000.000
$ 4.000.000
$ 5.000.000
Complete
Damage potential
$ 10.000.000
$ 16.500.000
$ 23.000.000

We can discuss your desired level of security with you in detail. Should the sum insured in your D&O insurance program be based on a loss event that statistically occurs every two, five, ten, twenty or Y years? You can also base your reserve planning for potential disputes on this.

Why Risk Partners is your partner for foreign filers and US IPOs?

  • Market-leading conditions from Risk Partners:
    • Proven in claims, IPOs and capital market deals for numerous US IPOs of foreign filers. Florian has already successfully defended two US class actions as insurance manager of a DAX40 company. We therefore also provide support with an experienced network of lawyers, particularly in the event of a claim.
    • Consideration of the special conditions of national and international market specifics Adaptation to multi-jurisdictions possible, e.g. if the stock exchange and headquarters are located in different countries and different liability frameworks apply.
    • Accepted and jointly developed by leading ECM law firms, auditors and consultants.
  • Professional "lean" process thanks to our specialization:
    • In addition to the streamlined integration of the insurance stream into the project planning, we know the needs of various stakeholders at certain points in the project and prepare you accordingly
    • We clearly state what is required from your side as well as your law firm(s) commissioned for the prospectus with a clear timeline in order to spare your top management's busy time as much as possible.
    • Coaching on liability and, on request, a briefing for your top management before an underwriting call for the best possible marketing on the insurance market
  • Complexity is our core competence:
    • We transfer almost exclusively complex risks: To this end, we are in personal contact with all leading risk carriers in continental Europe on your behalf. We always strive to find innovative solutions that suit your needs.
    • Global Team of Experts: If a project requires it, we can also find the necessary capacities and suitable concepts in London, Bermuda and the USA with our strategic cooperation brokers. In addition to our international network partners, we are also regularly on site to personally market our clients' risks in London and other markets.
    • Our long-standing relationships with insurance partners ensure even more opportunities in marketing and the best results in finding premiums, as we consistently integrate international insurance markets into the tendering process and thus "challenge" offers globally for innovations and premiums
  • Experienced deal team on every project
    • We are experts consisting of fully qualified lawyers, business economists and risk managers, so that we meet the challenging discussions with all stakeholders at eye level and also speak their "language". (from investment banks and their law firms, management boards, supervisory boards to auditors)
    • The deal team has many years of experience from numerous well-known US IPOs of German and European companies from the life sciences, tech and space sectors: ask for our references and we will be happy to put you in touch with the contact persons of our clients themselves.
    • We are familiar with the special pressure and project management of the often tight timelines on projects. We are available at any time during the project, including weekends 
    • Florian has already managed the IPO project for large capital market transactions from the "in-house perspective" of a DAX40 company and therefore knows first-hand the issues of the supervisory board, as well as the processes between the stakeholders and the preparation of the prospectus

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