AUK insurance expert has warned Chinese companies wanting to exit US markets they face investigations and even threats of bumped-up claims if they attempt to delist.
Alison Clarke, a partner at Reynolds Porter Chamberlain (RPC) in London, said half of the companies that had tried to go private in the past 18 months had faced tough scrutiny from shareholders in the wake of recent accounting scandals that had affected some listed Chinese companies.
“In the last 18 months, half of the 30 or so US-listed Chinese companies which have unveiled plans to delist and return to private ownership have either had those plans investigated by lawyers engaged by public shareholders, or actually been threatened with bump-up claims,” Clarke told China Business Law Journal.
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“They should liaise closely with their insurance brokers during the process of obtaining/renewing their directors & officers (D&O) cover, so they understand the extent to which their D&O policy covers bump-up claims,” Clarke said.
After a company is taken private, US minority shareholders often sue the new private owner in a class action claim to “bump up” the price received for the shares. “Such claims can be expensive to defend and the shareholders’ allegations may adversely affect the directors’ professional reputations,” RPC’s legal director in Singapore, Jeremy Hewitt, told China Business Law Journal.
Chinese companies, in particular, are facing a higher risk because they are delisting at historically low share prices and the business often ends under the ownership of its original majority shareholders.
This makes D&O insurers watch the risk closely and consider excluding the coverage of such claims in their D&O policies, especially issuers in Europe and Asia as exclusions of bump-up claims are still rare in those regions.
“Very few D&O insurers will insist on imposing bump-up exclusions without good reasons and there are other options available,” Clarke said.
For example, Hewitt said: “The directors and their D&O insurers could agree to: a sub-limit for bump-up claims, meaning that insurers are not exposed to a full-limit loss for those claims but the directors still get a measure of protection; or a narrower exclusion for delisting/privatisation deals, which leaves scope for the policy to cover bump-up claims arising from other M&A activity.”
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