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Dual-track procedure - D&O and POSI insurance in a private sale or IPO

In unserer Serie zur D&O-Versicherung und den Anforderungen spezifischer Branchen – siehe Teil 1: “Alles Wichtige zur D&O Versicherung für Wachstumsunternehmen“ und Teil 2: “D&O-Versicherung für GPs von Venture Capital und Private Equity Fonds” – möchten wir uns nun den besonderen Anforderungen im Rahmen des Dual-Track-Verfahrens geben. Insbesondere, sofern dies parallel von der beratenden Investmentbank getrieben wird, sind die Aufgaben enorm. Um den wichtigen Versicherungsstream aus Haftungssicht richtig aufzustellen, haben wir unsere Erfahrungen aus Dual-Track-Verfahren zusammengetragen. Hierbei verfolgen wir das Ziel neben ersten Informationen vor allem die Mehrwerte eines “vorbereiteten” Setups zu unterstreichen, das nicht nur den Arbeitsaufwand deutlich erleichtern, sondern eben auch die Absicherung – nicht zuletzt der Geschäftsleitung – deutlich verbessern!

What is the dual-track process?

The dual-track process is an exit strategy that aims to create the best possible conditions for the sale or partial sale of a company. The seller pursues two options in parallel: the sale via a classic M&A transaction (merger & acquisition) and an initial public offering (IPO). Both of these options are evaluated either simultaneously or in close succession, such as in the case of our Steyr Motors AG mandate. Particularly in volatile market situations, in which macroeconomic and geopolitical factors move the market intensively, the dual-track procedure offers the opportunity to react flexibly to these market changes and to optimize the exit conditions or the possibilities for a parallel capital increase. The latter with both a short-term and long-term perspective.

Challenges and risks in the dual-track process

Each of the two strategies entails specific risks that affect companies, their stakeholders and, in particular, the responsible decision-makers:

IPO risks: A public offering of securities entails considerable liability risks. The issue is intensively scrutinized by regulatory authorities and later by investors. Possible errors or omissions in the prospectus can lead to lawsuits and claims for damages.
M&A risks: In a private transaction, liabilities arise from the share purchase agreement (SPA). These include guarantees and indemnities that can potentially result in significant financial obligations after the transaction has been completed.

Insurance for the dual-track procedure

Um diese Risiken zu managen, spielen zwei “Projekt”-Versicherungsarten neben des D&O-Versicherungsprogramms eine zentrale Rolle:

Warranty & Indemnity (W&I) insurance: This insurance covers liability risks arising from warranties and representations in the purchase contract. It can protect both the seller and the buyer from unknown breaches and the associated costs.
- Advantages:
  - Extended liability periods (24-36 months for commercial guarantees, up to 10 years for tax and basic guarantees).
  - Protection against financial burdens arising from breaches of warranty.
  - Specific cover for complex risks: It often also covers tax and environmental risks that can arise in complex M&A transactions.
  - Efficient claims settlement: The claims ratio for W&I insurance is around 10-15%, with many claims being successfully settled to relieve the parties of financial burdens.
Prospectus Offering Securities Insurance (POSI): This POSI insurance, which was specially developed for capital market transactions (IPOs, SPOs, bonds, etc.) and the associated special liability, covers liability risks that can arise, for example, due to inadequate information in the issue prospectus.
- Advantages:
  - Comprehensive protection for all parties involved in the IPO (issuer, banks, auditors, etc.).
  - Long-term coverage (e.g. 12 years for German IPOs).
  - Reduction of liability peaks: POSI policies can effectively manage risks associated with errors or omissions in the prospectus, as explained in our specialist article on POSI insurance.
  - Flexibility in coverage: Depending on the requirements, POSI coverage can be adapted to the specific conditions of the IPO to ensure comprehensive protection.

Competitive advantage through the dual-track process

A key advantage of the dual-track process is that it creates competition between potential buyers and public investors. This can significantly increase the value of the company and give the seller a better negotiating position. Flexibility is key: the strategy allows investors to react to changing market conditions and choose the most advantageous exit option.

Practical example: POSI in action

A European tech champion went public. After the issue, the share price fell and a lawsuit was filed by shareholders for allegedly misleading information in the prospectus. Thanks to POSI insurance, 2 million euros in defense costs and 25 million euros in compensation were covered.

Risk Partners on the Deutsche Börse podcast

Exclusive

As a specialist broker for capital market liability, our Managing Director Florian Eckstein had the opportunity to record a podcast with Alexander Rang, a leading capital market lawyer in Germany, for Deutsche Börse 's "Road to IPO" series and Joel Kaczmarek (Digital Kompakt). Prospectus liability insurance (POSI) plays an important role, as do other valuable aspects of risk and liability management. Listen in as Alexander and Florian share relevant tips and best practices on liability and insurance strategies from their stock exchange projects.

Conclusion: Strategic risk minimization for your exit

Das Dual-Track-Verfahren bietet Gesellschaften wie den Gründern und Finanzinvestoren wie Private Equity oder Venture Capital Fonds die Möglichkeit, Flexibilität und Wettbewerbsvorteile des “public und private Markets” zu nutzen. Gleichzeitig stellen die spezifischen Risiken beider Exit-Strategien hohe Anforderungen an das Risiko- und Versicherungsmanagement, um die jeweils besondere Haftung zu adressieren und die unterschiedlichen Versicherungsmärkte richtig anzusprechen. Mit den richtigen Versicherungsstrategien können diese Risiken effektiv minimiert werden.

Why Risk Partners in the DUAL-Track process?

As a specialized insurance broker, Risk Partners offers comprehensive expertise in the coverage of dual-track processes. Our solutions are specially tailored to the needs of the German market and its legal peculiarities. We accompany you from the risk analysis to the final placement of the insurance and ensure that your interests are optimally protected.
Our services at a glance:
- Individual advice and customized policies.
- Use of state-of-the-art insurance products such as W&I and POSI.
- Competent support from an experienced team directly on site.

Questions? Talk to us!

Do you have any questions about how to protect yourself or your portfolio companies against directors' and officers' liability risks in a way that is cost-effective and minimizes your workload? Let's talk at your preferred time:

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