Wednesday, 25 September 2013

Directors entitled to defence cost coverage under D&O insurance

Company directors and officers can take some comfort that the Australian courts have recognised their entitlement to access insurance cover for defence costs in the event of a claim under Directors and Officers Liability (D&O) insurance policies. 

The Chairman’s Red Book (page 67) made reference to the New Zealand judgment in Bridgecorp which held that a charge could be brought by plaintiffs in class action proceedings to preserve the funds available under D&O insurance for their potential benefit.  The application of such a charge would deny the defendant directors and executives access to insurance cover for defence costs incurred in defending the class action proceedings.  This judgment was overturned on appeal with the NZ Court of Appeal recognising the two distinct limbs of cover applicable under D&O policies - being defence costs cover and the legal liability cover for damages, judgments or settlements.

These cases were relevant to directors and officers in Australia because the same legislative provisions applicable in New Zealand, to enable a charge to be imposed on the proceeds of an insurance policy, are applicable in New South Wales, Tasmania and the ACT.

On 11 July 2013, the NSW Court of Appeal considered the opportunity for class action plaintiffs to bring a charge over the proceeds of D&O insurance policies held by directors and executives of the now collapsed Great Southern Group.  Beneficially, the Court drew a clear distinction between the two separate covers under D&O insurance policies and recognised the importance of directors and officers accessing defence costs under D&O policies.

The Court did not entirely rule out the possibility for a charge to be imposed over the proceeds of a D&O policy.  However, it noted that any award of damages against a director or officer covered under a D&O policy would necessarily follow the incurring of defence costs to which a director or officer was entitled to cover in priority to the proceeds subject to a charge.  The Court also recognised that a director’s entitlement to insurance cover to mount a vigorous defence to legal proceedings, and potentially reduce or eliminate any ultimate award of damages against the director, was equally advantageous for insurers who advanced the defence costs coverage.

While this most recent judgment has provided clarity on the issue of directors and officers entitlement to defence costs under D&O policies, it has also highlighted the necessity for directors and officers to be aware of potential ‘internal’ competition to the limited amount of cover available under these policies.

D&O policies rarely contain a priority of payment or preservation provision to ensure cover is always available for directors and officers.  This is especially critical if the D&O policy also affords cover to the corporate entity, as well as the directors and officers, which is often the case.  Similarly, the D&O coverage may ‘compete’ for or be tied to a limit of liability which is also applicable to professional indemnity, crime or other classes of insurance.

For these reasons, directors and officers should investigate and have a clear understanding of the cover, placement and structure of their D&O insurance policy.

Diana is a Senior Associate at McCullough Robertson

Friday, 13 September 2013

Are back door listings the easier alternative?

In considering potential avenues for achieving a listing on a stock exchange, a concept that is commonly promoted is that of a ‘back door listing’.  This is particularly so given that the number of initial public offerings (IPOs), or ‘front door listings’, has declined significantly and companies are seeking alternatives for taking the next step to become a publicly listed company.

A back door listing can take a number of forms, but typically involves a listed entity (that has often wound down its operations and is subject to a suspension of trading in its securities) acquiring an unlisted entity or its assets and in exchange issuing shares in the listed entity to the vendors.  The shareholders in the unlisted entity will usually control the listed entity following completion of the back door listing.

Back door listings are often promoted as a cheaper and quicker route to achieve a listing.  This is not necessarily the case and, for a listing on ASX, the requirements set out in Chapter 11 of the Listing Rules can result in costs and timing pressures that may be greater than those experienced for an IPO.  At the discretion of the ASX, this may include having to obtain shareholder approval and, potentially, having to re-satisfy the admission requirements (e.g. by requiring a prospectus), becoming a ‘de facto IPO’. 

Some of the key advantages and disadvantages are highlighted in the attached tables.

Although a back door listing may be appropriate in some circumstances, the process should be treated with care, appropriate due diligence on the listed entity should be conducted, and the board and owners of the unlisted entity should consider whether an IPO may be the better way to achieve a listing.