Will Your D&O Policy Cover the Risk Of Shareholders with Dual or Multiple Capacities?

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Shareholders who hold dual or multiple capacities at your organization will impact who is an insured and ultimately covered under your organization’s D&O policy. Such dual capacities and the reps and warranties made from those roles are especially important in M&A situations. In order to avoid a costly dispute with your carrier, work with your broker now to fully understand how your D&O insurance is likely to play out (and not pay out) in the event of a dispute over a merger or acquisition as well as to discuss what additional measures might be considered in how to structure your corporation and/or insurance portfolio to effectively manage the risks inherent in the transaction.

One recent decision in particular highlights how the interrelated roles of an insured’s shareholders impacted their coverage. The case of Spicer v. National Union Fire Insurance Company, 2021 U.S. Dist. LEXIS 125513 (S.D.N.Y. July 3, 2021) (“Spicer”) involved the purchase in 2015 by GardaWorld Consulting (UK) Limited (GardaWorld) of the outstanding shares of Hestia, B.V. (Hestia). The purchase included the operations of Hestia’s subsidiaries, including Aegis Defense Services, LLC (Aegis). Two years after the transaction, various shareholders of the acquired entity (Hestia) sued GardaWorld for allegedly failing to comply with certain payment terms in the governing purchase and sale agreement. GardaWorld then filed various counterclaims against certain of the Hestia shareholder plaintiffs, namely the Hestia controlling shareholders who also were Aegis executives at the time of the sale. GardaWorld alleges that the Hestia controlling shareholders misrepresented the financial condition of the Aegis businesses and thus induced GardaWorld to pay an inflated purchase price for Hestia.

At the time of the acquisition, Hestia (the parent) purchased D&O insurance from Chubb, and Aegis (the sub) purchased D&O insurance from National Union.  They are all now in negotiations (and court) over who will pay the costs needed to defend GardaWorld’s counterclaims.  Chubb and National Union appear to be taking similar positions that neither D&O policy applies because GardaWorld is suing the individual defendants in their capacity as Hestia shareholders and not as Hestia or Aegis executives.  The counterclaim defendants, on the other hand, argue that, given that the counterclaims for misrepresentation center around the financial condition of and disclosures by Aegis, Aegis’ National Union D&O policy must defend.

National Union and the individual defendants have taken their coverage dispute to court, and at least for now, National Union must advance the individual defendants their defense costs.  The Court in Spicer held that, at this time, it could not as a matter of law find that no coverage existed under the National Union D&O policy, given the interrelated nature of the individual defendants’ involvement in GardaWorld’s purchase of Hestia, as both Hestia shareholders and Aegis executives potentially involved in the actual disclosures (or lack thereof) of information about Aegis.  The costly coverage dispute thus continues, and National Union (and presumably Chubb as well) is likely to seek a reimbursement of the fees advanced if coverage ultimately is held not to exist.

The positions and conduct of your organization’s shareholders will impact the availability of D&O coverage.  In the Spicer case, the Hestia shareholders appeared to serve roles on both sides of the acquisition.  Were they acting as Hestia or Aegis executives?  This is a critical inquiry to conduct when examining dual capacity issues and who is defined as an “insured” under your D&O policy.  To review these issues and discuss these implications, please contact Henderson Brothers today.


Please note that the information contained in this posting is designed to provide general awareness in regard to the subject matter covered. It is not provided as legal, medical, or tax advice, nor is it intended to address all concerns in your workplace or for public health. No representation is made as to the sufficiency for your specific company’s needs. This post should be reviewed by your legal counsel or tax consultant before use.

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