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July 20, 2017

The importance of insurance for bank mergers

Mergers and acquisitions have become common occurrences in the financial industry. Regulatory burdens, customer demands and new technologies force many smaller community and regional banks, as well as credit unions, to gobble up one another in a highly competitive industry.

But along with mergers comes the threat of lawsuits. According to recent research, nearly 75% of all mergers in the U.S. worth over $100 million resulted in at least one lawsuit. While numbers specific to the banking industry are not available, anecdotal evidence shows lawyers will often file a shareholder’s suit or similar litigation. Management teams and board members face exposure if a lawsuit succeeds.

Mergers and acquisitions are very complicated affairs. Any number of liabilities can occur during the process. For instance, the company, their directors, and their board members can easily find themselves named in a shareholder’s suit.

The high potential for liability makes directors and officers (D&O) insurance of the utmost importance for when embarking on a merger. 

What is D&O insurance?

D&O insurance protects managers and board members against any liabilities and damages that may stem from settlements and defense costs involved in lawsuits alleging various wrongful acts.

Often, these suits allege that management acted in a neglectful manner, made various management errors or misled investors during the course of a merger. Plaintiffs’ attorneys focus on statements and actions made by bank directors and officers. In addition, some lawsuits specifically focus on disclosures, in which a plaintiff claims a bank breached its fiduciary duties by failing to provide enough information on a registration statement.

Settlements in these types of lawsuits typically end with a defendant at a minimum agreeing to pay the plaintiffs’ legal fees and other costs. D&O insurance can pick up the costs of these fees. Without the right D&O coverage, a company may have to pay a significant sum of money that can hurt its bottom line while they are still integrating with another company.

In addition, D&O insurance can cover the spouse of a director or officer, who may also find themselves named in a lawsuit. 

Tips to mitigate risks

There are many ways boards and officers can lower their exposure to liabilities during the merger process.

The first step is for officers to review and update their insurance policies. Professional and managerial policies constantly need updating in an industry affected by ever-changing market dynamics and regulatory policies. It is critical to make sure that the policies are updated before the board and officers start making key decisions pertaining to a merger.

Experienced partners can be invaluable during a merger. Smaller banks may not have the in-house resources to handle a merger, and a bank’s usual firms for legal and accounting issues may not have the experience needed to handle the complicated merger process.

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