When companies and directors are considering embarking on capital raising activity, there is a lot to consider and manage: strategy; investor presentations; lawyers drafting the Information Memorandum; tax and legal advisors conducting due diligence where required.  Such activity must be carefully orchestrated and managed for a transaction to be successful.  Insurance may not be on the agenda until much later in the process, if on the agenda at all.  However, there are real dangers in neglecting to factor in insurance review as part of the process.  Below we cover at a very high level some important points to be aware of to undertake a successful and commercially prudent capital raising.

Raising capital from the public:  just “another day in the office” from a risk perspective?   

No, even for those who do it on a regular basis. Raising capital poses increased and/or new liability risks that both the company and its directors should be aware of in order to consider appropriate risk mitigation and/or risk transfer mechanisms, where appropriate.  From an insurance point of view, raising capital is far from a ‘business as usual’ corporate risk. 

New Zealand’s securities law is in a period of transition which is altering the landscape of risk. Although New Zealand is not yet at the levels of USA and Australia (where regulatory action and security class action claims are commonplace) the overhaul of our securities law signals a significant shift.  The Financial Markets Authority has been touted as "increasingly prepared to flex its regulatory muscles" .  The steady stream of investigations and prosecutions we have seen in the past four years since it was established in 2011 prove this to be true.

We already have D&O: isn’t that enough?

Relying on the company’s existing liability programme to cater to the risks associated with a capital raising is arguably naïve at best and poor governance at worst.  Most D&O policies exclude cover for claims related to share issuances and/or claims related to statements contained in prospectuses or documents relied on for raising capital.   Further, changes to the company’s capital structure in the lead up to or as a result of the capital raising transaction can trigger a common condition that removes cover for conduct after the change in capital structure. 

What are some examples of events following a capital raising that might trigger legal claims?

• Earnings fail to meet projections contained in the formal offer documents (e.g. a prospectus) or roadshow materials prepared for potential shareholders 
• Accounting restatements closely following the capital raising
• Inadequate disclosure of M&A (merger and acquisition) activity prior to the offer

Who are some of the potential claimants?

• Regulators, e.g. the FMA, NZX & overseas regulators where business might be operating outside New Zealand
• Shareholders
• Counterparties, e.g. underwriters, lead managers

What are the insurance solutions for the legal liability risks arising from capital raising activities involving offers to the public? 

1. Extending an existing Directors and Officers Liability (D&O) insurance programme; or 
2. Purchasing a special Public Offering of Securities stand alone, multi-year insurance policy (“POSI”) 

Which option is better?

A POSI preserves the D&O limit: D&O policies cover claims arising out of the “day to day” activities of a company whilst a POSI policy is specific to a particular capital raising.  Our typical recommendation is to procure a POSI in order to preserve the D&O limit for the day to day corporate risks.  

A POSI is more attractive from a budgeting perspective.  D&O policy costs are inherently uncertain as cover is normally arranged on a year-by-year basis with pricing open to fluctuations in the risk.  A POSI is generally a multi-year policy that is paid for by a one-off premium, thus a more “set and forget” solution for capital raising risks. 

How much does insurance for capital raising cost?

It depends: there is no standard “market rate” to gauge premiums as Insurers will assess the company profile; prospectus/Information Memorandum; limits soughts etc.  An experienced POSI broker can provide (on an anonymous basis) benchmarking information based on previous covers they have arranged. 

Important things to consider regarding insurance for capital raising activities

• Get good advice and do it early.  Timing is crucial for optimum POSI placement in terms of pricing and coverage, as brokers need time to gather information and Insurers need time to properly assess.  For best results, engage with an experienced liability broker as soon as start engaging with your lawyers.  
• Ask your broker about their particular experience. Very few insurance brokers (even within individual firms) are highly experienced with this kind of cover. 
• Be very wary of making decisions based on price alone. Policy wordings vary significantly from insurer to insurer. Insurers do not write risk associated with capital raisings lightly and a price that is wildly out of step with other quotations may mask coverage inadequacies. Insurers commonly only price what they are asked for and this makes the expertise of your insurance broker critical.

For more information on capital raising risks and insurance please contact Heidi Axtell (heidi.axtell@marsh.com) or Xavier Marguinaud (xavier.marguinaud@marsh.com).