Cyan and secondary offerings
The case known as Cyan means many more of us are now aware that US 1933 Securities Act claims are frequently heard in state courts rather than US federal courts. And the decision in Cyan Inc. v. Beaver Country Employees Retirement Fund in 2018 (discussed previously here) also ensured that this trend is here to stay for the foreseeable future. However, one issue that is becoming more pressing is the potential impact on directors & officers (D&O) claims of state courts being used to litigate secondary public offerings.
The 1933 Act covers regulation for the initial registration of securities on any stock exchange in the US. Relatively high D&O claims frequency and settlement for 1933 Act cases heard at state court in the last few years has led to some insurers using higher deductibles to mitigate risk. Indeed some insurers that previously insured US initial public offerings (IPOs) have now withdrawn from that market.
A secondary offering is the sale of new or closely held shares by a company that has already had an IPO. Such an offering may require a new registration statement with the SEC and therefore may come under the auspices of the 1933 Act.
One such case is that of Endo, an Irish company listed on the New York Stock Exchange, which issued new shares in 2015 via a secondary offering. After the share price plummeted in the months following the offering, a state court action commenced at the Court of Common Pleas of Chester County, Pennsylvania in 2017. The claim eventually settled for $50m in 2018. 1
The Endo case shows secondary offerings are at risk from the Cyan decision – perhaps not as much as IPOs, but certainly pose a change to the D&O landscape in the US that needs to be addressed by insurers as soon as possible.
How should we deal with this risk as an insurer? We may not know that our clients are planning a new offering given that many policies will cover new offerings in the (future) policy period without requiring any further information or policy adjustment. There are some options available – should we be increasing the deductibles for secondary offerings, or is it time to exclude cover for such secondary offerings until we as insurers know that the offering is to take place. We can then offer to help our clients by providing the right type of coverage, whether that be to include coverage within the D&O or ring-fence the exposure in a POSI policy.
The US continues to offer D&O insurers opportunity to grow top line but we must ensure we stay ahead of the potential pit falls before they occur, and treading carefully around secondary offerings would be prudent.
About the author:
Tom underwrites large D&O risks, US domiciled and non US domiciled as part of the Management Liability group within Specialty Lines.