Private equity and venture capital management teams face a broad range of potential liabilities when fulfilling their roles as directors of portfolio companies.
Managing the risk of personal liability arising from outside directorships is an ongoing concern for executives, as serving as a director is often optional, but a core part of the investment firm’s policy.
Private equity directors need to be aware of the competing interests of their own firm and their portfolio company in order to avoid the risk of liability, for example for failing to uphold their fiduciary responsibility to the portfolio company, or putting the interests of their own firm first.
With fund investors and shareholders focusing on greater transparency and enhanced governance, before taking an outside board position there are a number of factors to consider.
-
Explore and understand your portfolio company’s D&O Coverage
Establish first and foremost if the portfolio company you’ll be joining as director has in place comprehensive D&O coverage. If in place, it is sensible to get specialist advisors to review and determine the coverage provided and the limits of liability. Should there be inadequate or no cover in place, it is important to take a lead role in the decision to purchase coverage so that you are in control of the specific levels of cover and protections in place.
-
Cover yourself with an Outside Directorship Liability policy
Designed with companies, rather than individuals in mind, D&O insurance focuses on protecting the directors and executives of the portfolio company. It may not protect an outside director acting in a fiduciary capacity in the event of an accusation of failing to uphold the fiduciary duties owed to the portfolio company. One way to mitigate this risk is to tailor specialised liability cover that responds specifically to the risks facing portfolio company directors that have a dual role as a fund general partner.
-
Focus on corporate best-practice
While serving on a portfolio company board, directors need to demonstrate that there is no conflict of interest, which can lead to litigation. Best-practice methods in clude attending all board meetings, transparency - keeping clear written records, and working with the board to further the best interests of the portfolio company. Keeping the role very separate from the private equity role is key.
Private equity fund managers may find themselves with a number of outside directorships. This inevitably leads to a range of potential liabilities and often perceived conflict of interest.
To mitigate these risks, it is important to ensure that your portfolio company has appropriate D&O coverage in place, and that you protect yourself with further Outside Directorship coverage to fill the gaps in corporate D&O coverage. In addition, focusing on corporate best-practice by effectively fulfilling fiduciary responsibilities to the portfolio company and focusing on best-practice transparency will ensure the liability risks are mitigated.
==========
My name is Delphine Leroy. As the Financial Lines Underwriting Director for Continental Europe, I head up CNA Hardy’s Management Liability, Financial Institutions and Professional Indemnity Continental underwriting team. Follow CNA Hardy’s blog series on LinkedIn.