Adapt Your D&O Coverage After the De-SPAC Transaction

So. The champagne's been popped, the merger's all done, and your SPAC has successfully transformed into an operating company. But as the confetti settles, a new (somewhat less exciting, but very important) challenge emerges: adapting your directors and officers (D&O) insurance to fit your company's new reality.

Understanding the Changing Risk Landscape

From SPAC to Operating Company

The completion of a de-SPAC transaction marks the end of one journey…and the beginning of another. Your company is no longer a blank-check entity focused on finding a merger target. It's now a full-fledged operating company with a whole new set of risks and exposures.

This transformation brings major changes to your risk profile. Where once your primary concerns revolved around the IPO process and finding the right merger partner, you now face the complexities of day-to-day business operations. Product liability, employment practices, cybersecurity, and industry-specific regulatory compliance suddenly become very pressing issues.

Heightened Scrutiny and Litigation Risks

Moreover, your company now faces a level of scrutiny it may not have experienced before. Shareholders, regulators, and market analysts are all watching closely, particularly in the immediate aftermath of the merger. If your company's performance doesn't quite match up to the projections made during the SPAC process, you could find yourself facing litigation.

Key Areas of Focus for Post-Merger D&O Coverage

Tail Coverage for the SPAC

One of the first orders of business is securing adequate tail coverage for the SPAC's pre-merger activities. Think of this as a safety net for your past. It extends the reporting period of your original D&O policy, typically for three to six years post-merger. This coverage is your safeguard against claims that might arise from the SPAC's activities, including the IPO and merger process.

Transitioning to Operational Company Coverage

But while you're securing your past, you need to be equally focused on the present and future. Your D&O policy needs a thorough overhaul to address your new operational risks. This might mean increasing policy limits to reflect your larger, combined entity, adjusting retentions to align with your new risk profile, and expanding coverage to include risks specific to your operating industry.

Addressing Regulatory Risks

As a newly formed operating company, you're likely sailing into uncharted regulatory waters. The rules of the game have changed, and your D&O policy needs to keep pace. You'll want to ensure you have adequate coverage for industry-specific regulatory investigations and actions, costs associated with regulatory compliance, and defense costs for allegations of regulatory violations.

Managing Continuity of Coverage

Coordinating between your SPAC's tail coverage and your new operational company's go-forward coverage is a delicate balancing act. You need to pay close attention to how the policies define the transition point between pre and post-merger activities, any potential overlaps or gaps in coverage periods, and ensure consistency in definitions and exclusions between policies.

Special Considerations for the Post-Merger Period

Financial Performance Claims

In the aftermath of your de-SPAC transaction, your company is likely to find itself under a particularly bright spotlight. The financial projections made during the SPAC process will be under scrutiny, and any failure to meet post-merger performance expectations could lead to shareholder suits.

Your D&O coverage needs to be robust enough to handle claims related to alleged misrepresentations in financial forecasts or allegations of overvaluation of the target company. It's not just about protection; it's about giving your leadership the confidence to navigate this high-pressure period without undue fear of personal liability.

Integration-Related Risks

The post-merger integration process brings its own set of challenges. As you blend two companies into one, you might face workforce reductions, changes in corporate governance, or allegations of mismanagement during the integration process. Your D&O policy should be prepared to respond to these integration-related risks.

Public Company Reporting Obligations

Furthermore, as a newly public operating company, you're now subject to a host of reporting obligations that may not have applied before. Your D&O coverage needs to adequately address risks related to SEC reporting requirements, Sarbanes-Oxley compliance, and ongoing investor communications and disclosures.

Structuring the New D&O Program

Limits and Retentions

With all these changes, your D&O program likely needs significant restructuring. You'll need to reassess appropriate limits and retentions, considering your increased size and complexity, industry benchmarks, and your organization's risk appetite.

Coverage Enhancements

You might also want to explore enhancements to your D&O program. Side A Difference in Conditions (DIC) coverage, entity investigation coverage, or predetermined run-off provisions for future changes in control could all be valuable additions to your insurance portfolio.

International Considerations

If your post-merger company has international operations, that adds another layer of complexity. Your D&O program needs to address local policy requirements in relevant jurisdictions, provide coverage for directors and officers of foreign subsidiaries, and ensure compliance with international regulations.

Ongoing Management of D&O Coverage

Regular Policy Reviews

Adapting your D&O coverage after a de-SPAC transaction isn't a one-and-done process. It requires ongoing attention and regular reviews, particularly in the first few years post-merger. Your risk profile will continue to evolve as your company grows and changes, and your D&O coverage should evolve with it.

Risk Management Integration

Integrating D&O insurance considerations into your broader risk management strategies is key. It should align with your corporate governance practices, compliance programs, and enterprise risk management initiatives. This holistic approach ensures that your D&O coverage isn't operating in a vacuum but is part of a comprehensive risk management framework.

The transition from SPAC to operating public company is complicated, and your D&O coverage is a critical companion on this path. By thoughtfully adapting your coverage to your new reality, you provide a solid foundation for your company's future growth. It allows your leadership to focus on what really matters — steering your newly formed company towards success in its next chapter.

Looking for help? The Janover Insurance team will get you a free quote and connect you with your best D&O policy, rapidly.