Are you an executive, officer, or director of a public company under $300 MM in market cap?  If so, the odds are pretty good that you lost significant market value due to the Coronavirus and are in crisis mode.  But another crisis could be looming – your company and personal liability exposure.

Everything I am about to tell you applies to all companies, public and private, large and small, and all their respective executives and board members.  However, the following information is especially pertinent to sub-$300 MM market cap companies who tend to not have a risk management department, in-house legal counsel, and the cash reserves of large-cap companies.

All company executives are currently in crisis mode with a significant priority list that includes:

  • Are our employees safe and secure?

  • What is our run rate? How long can we survive?

  • Have we lost any of our funding?

  • Have we secured our supply chain?

  • What will the financial impact be on the business?

  • Where can we reduce expenses and cut costs?

  • Do we qualify for any government stimulus assistance?

  • Have we adequately communicated with our customers?

  • Have we adequately communicated with our shareholders?

  • Have we kept our board up-to-date with regular communication?

These are just a few of the questions that are likely on every executive’s mind right now, on top of normal business operations.  Of equal importance, here are the questions that are likely not on their minds but should be:

  • With a rapid decline in market valuation, will shareholder lawsuits increase?

  • Did the BOD and executive team exercise corporate governance with precision and zero mistakes?

  • If the Company decides not to pay a vendor and the Company becomes insolvent, can the BOD and executive team be held personally responsible?

  • If the Company laid off their employees, can the BOD and executive team be held personally liable for Employment Practice Claims?

  • Does the Company have adequate D&O coverage in place?

  • Does the Company have an excess policy for Side A only?

  • Do BOD members and executives have $500k+, personally, in reserves for litigation expenses?

The time to think about personal liability is NOW.  Yes, NOW, when you are scrambling to manage all the other business and personal chaos.  If you do not pay attention to this now, it will be too late.

It is not necessary for you to have done something “wrong.”  Your stock is down, and that is enough.  This is business – the only guarantees in life are death, taxes, and lawyers finding ways to capitalize on your misfortunes.  It is almost certain that companies will see a massive increase in plaintiff’s attorney shareholder lawsuits.  Attorneys prey on smaller companies because they know that corporate governance is typically less stringent and they have fewer resources to contest claims.  Once a lawyer finds a small item that they can hang their hat on, they will attack the Company, its assets, and the personal assets of the entire board and executive team.

The Common Responses I Receive from Executives

  • Our I’s are dotted, and our T’s are crossed.

  • We have a small board/executive team and trust all their actions.

  • We have a small shareholder base composed mostly of family and friends.

My Response to These Rebuttals

  • All these things may be well and true; however, the real question is if the Company is solvent enough to weather the legal fees and losses of a substantial shareholder loss, can they still indemnify you?  Probably not.  Last I heard, average legal fees for a shareholder lawsuit are $3.5 MM.  For most sub-$300 MM market cap companies, this will wipe them out.

  • Your family member just lost 80% of their net worth, and most of that was from your stock.  Your family will tell you they aren’t suing you, but they are suing your insurance company. Additionally, anything that can be perceived as inside information will surface, a text from two years ago, or a story from a family picnic.

Shareholder lawsuits are costly, both in terms of your time and money.  Even if you made no mistakes and never did anything wrong, you still have to defend yourself.  How much Directors and Officers (D&O) coverage do you have?  $1 MM, $5 MM, or $10 MM?  How much capital have you raised in the past five years? You could easily chew through your D&O limits without blinking.  If there is no money left to defend the company, where is the money going to come from to protect your personal assets?

The Bottom Line

Most companies sub-$300 MM market cap purchased their D&O policies to appease board members and bankers.  Most, if not all, of these executive teams never took the time to truly understand their policies.  Due to the size of the policies, small in comparison to other public companies, they were likely purchased from someone who does not specialize in D&O liability insurance and other management liability products.

D&O insurance is the ONLY TRUE PROTECTION a board or executive member has to protect their personal assets from corporate liabilities.  D&O policies are not like other insurance policies and have multiple layers, or Sides, that provide different types of protection.  Understanding and advising on these policies requires specialized knowledge and expertise.  Advising on these coverages for sub-$300 MM market cap companies takes even more niche expertise.

My Advice to Every Micro-cap and Small-cap CEO

  • Review your policies NOW.  This is great advice for any business owner, BOD member, or executive team. The common response will be, “I cannot afford to spend the time on that right now.”  My answer is you cannot afford not to wait – your entire world is at risk.

  • If your broker does not specialize in management liability products for public companies, find someone who does.

  • Understand how a D&O policy works and the different Sides – Side A,B,C?

  • Do you have a “Side A Only, DIC” policy? You should: This is the only policy that will ensure capital is available for legal defense costs and has no deductible. This is a policy that is purchased in excess of your primary D&O.

  • Review your coverage limits with your broker and take into consideration all your financing and business activities for the past few years and adjust coverage limits accordingly.

Understanding what type of D&O coverage you need is complicated but paramount for all companies, and even more important for the Directors and Officers who operate them, especially right now.  JAISIN Insurance Solutions is eager to share its expertise and experience. We can mitigate your legal risk so you can focus on what’s important, the safety of your employees and the success of your business.  Give us a call and we can determine if you have the right coverage that could save you millions.

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