March 28, 2019

Private Equity: No D&O for Directors Acting as Investors

This Locke Lord memo suggests that a recent Delaware case may be reason for PE fund representatives on portfolio company boards to take a closer look at their D&O coverage exclusions.  Here’s the intro:

In a case with implications for director and officer protections, and of particular relevance to principals of private equity firms, the Delaware Superior Court recently denied two former directors coverage under a D&O insurance policy. In Goggin v. National Union Fire Insurance Company of Pittsburgh, the Court construed a “capacity” exclusion in the policy to exclude coverage of an underlying claim that arose out of the directors’ positions as investors in the company, despite the fact that their alleged misconduct was a breach of their duties as directors and thus on its face eligible for coverage.

Goggin and Goodwin were investors in U.S. Coal Corporation beginning in 2007 and 2008, becoming directors in 2009 and remaining in that position until their resignations in 2014 and 2012, respectively. During their terms as directors, in an attempt to reinvigorate the failing U.S. Coal via debt repurchases and other recapitalization activities, they formed two investment vehicles for which they acted as manager or investor. Shortly after U.S. Coal entered bankruptcy in 2014, suit was brought alleging that Goodwin and Goggin breached their fiduciary duties and committed other acts for their own personal benefit.

The carrier disputed coverage, contending that the claim was attributable to actions taken by the directors in their capacity as investors, not as directors. The Court applied a “but for” test & held that because the fiduciary duty claims would have failed but for their roles with the investment vehicles, the carrier was off the hook. The blog notes that exclusions like these can significantly impact PE investor/directors during down round financings or in other distressed situations involving portfolio companies.

John Jenkins