Change in control clause (D&O)

The change in control clause is a D&O (directors and officers) clause that puts the policy into run-off when the policyholder is bought, merged or taken over. The standard wording defines the transaction. A person or group acting in concert acquires more than 50% of the policyholder's voting rights, or the right to appoint a majority of its board. The policyholder may also merge into another entity that survives the deal. The D&O policy then keeps running to expiry, but only for wrongful acts committed before the change in control. Whatever the directors do afterward, under the new shareholder, falls outside the cover. The policy goes into run-off automatically, and the premium is usually deemed fully earned. Most policies give an option to buy a longer run-off period, often six years, at a premium set in advance as a percentage of the annual premium. When that percentage is written into the original policy, nobody has to negotiate it in the middle of a deal. The acquirer reads the clause closely. The directors it appoints to run the target fall under its group policy from closing, and the line between the two contracts is drawn at that date, act by act. Representations and warranties insurance covers a different risk, the seller's statements about the value of the shares. A claim by a squeezed-out minority holder against the former directors falls back on the run-off. Triggers vary from one wording to the next. Some policies also cover the appointment of a receiver or liquidator. The loss of control over a subsidiary takes it out of scope for later acts.