Transcript Emerging Private Equity Professional and Management

Emerging Private Equity
Professional and Management
Liability Risks
Tuesday, March 31, 2015
Sponsored by PLUS Diamond Sponsors:
Yo u r s o u r c e f o r p r o f e s s i o n a l l i a b i l i t y e d u c a t i o n a n d n e t w o r k i n g .
Emerging Private Equity Professional and Management
Liability Risks
The information and opinions expressed by our panelists
today are their own, and do not necessarily represent the
views of their employers or of PLUS. The contents of
these materials may not be relied upon as legal advice.
A copy of the presentation slides will be available
following this webinar, on the PLUS website at:
www.plusweb.org
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Meet The Presenters
M. Machua Millett
Senior Vice President
Marsh USA, Inc.
Jennifer C. Hickox, RPLU
Vice President
HCC Global, Inc.
Jeremy Salzman, Esq.
Assistant Vice President
Arch Insurance Group
Moderator – Elan Kandel, Esq.
Member
Cozen O’Connor
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How Does Private Equity Work?
• Private equity firms (the general partners – GPs) raise capital from
investors (or limited partners – LPs) in a limited partnership legal structure.
• Private equity GPs sponsor funds, which invest this capital along with
funds borrowed from banks and other lenders, in “portfolio companies.”
• Private equity GPs typically hold investments in portfolio companies for
three to five years, and then sell them, hoping to realize a gain on the sale
as a result of the increased value they have created during their period of
ownership.
• Private equity firms receive “carried interest” and charge management fees
to the funds and portfolio companies (among other fees).
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Private Equity Overview
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The Private Equity Insurance Policy
Overview of a Typical Policy
• The Insuring Agreements
-Directors & Officers Liability coverage
(including management liability)
-Outside Entity Executive Liability
-Errors & Omissions/Professional Services
-Employment Practices Liability
-Fiduciary Liability
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Who is an Insured?
• The private equity firm
• The firm’s sponsored funds
• Subsidiaries
• Employees and directors and officers of
the above
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Who is Not an Insured?
• The fund’s limited partners
• Portfolio companies
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The SEC’s “Broken Windows”
Enforcement Strategy
“…minor violations that are overlooked or ignored can
feed bigger ones, and, perhaps more importantly, can
foster a culture where laws are increasingly treated as
toothless guidelines. And so, I believe it is important to
pursue even the smallest infractions.”
-SEC Commissioner Mary Jo
White, Oct. 9, 2013
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“First-of-their Kind” Enforcement
Actions
I. Fee and expense allocations
In re Clean Energy Capital, LLC and Scott
Brittenham
In the Matter of Lincolnshire Mgmt., Inc.
II. “Pay-to-Play”
In the Matter of TL Ventures, Inc.
III. Dodd-Frank Anti-Retaliation
 In the Matter of Paradigm Capital
Management, Inc. and Candace King Weir
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On the SEC’s Horizon….
More Fee and Expense Allocation Actions
 The use of “Operating Partners”
 Shifting of expenses from the private equity management entity to the fund or
portfolio company during the middle of the fund’s life without adequate disclosure.
Hidden Fees
 Monitoring fees charged beyond the typical portfolio company holding period
 Undisclosed administration fees
 Exceeding expense limits
 Affiliated expense limits
Marketing and Valuation
 Valuation methodologies
 Performance marketing where projections might be used in place of actual
valuations in marketing materials – without proper disclosure
 Changing valuation methodologies without proper disclosure
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Foreign Corrupt Practices Act Risks
The FCPA remains a hot button issue for the
DOJ and SEC
 Fund interactions with sovereign wealth funds
 Potential liability for actions committed by portfolio companies
Other jurisdictions have also enacted similar
statutes (i.e., UK Bribery Act)
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Coverage Issues
• The nature of the relief sought by the SEC and DOJ is
“disgorgement.”
• The definition of “loss” may exclude matters deemed
uninsurable under the relevant law or expressly
exclude disgorgement and restitution.
• Potential applicability of fraud/dishonesty exclusion.
• Is the SEC/DOJ investigation a “claim”?
• In what capacity are the PE firm’s D&Os ensnared in
the investigation?
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Transparency Litigation
• American Nat. Ins. Co. v. Lincolnshire Mgmt., et al.
– Limited partner brought derivative action and
direct claims on behalf of funds against private
equity management firm.
– Limited partner alleged that the management firm
wrongfully deducted “fees,” “expenses,” and
“interest,” in contravention of the limited
partnership agreements.
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Coverage Issues
• Among other things, plaintiffs asserted a
breach of fiduciary duty cause of action
against the defendants.
• Nature of relief sought included money
damages, disgorgement and attorneys’
fees.
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Collateral Consequences of the IPO Boom
 Private equity firms routinely named as defendants as
primary actors under Section 10(b) of the ’34 Act and
as controlling persons under Section 15 of ’33 Act
and Section 20(a) of the ‘34 Act.
 Directors appointed to the issuer’s board by the
private equity firm and its affiliated funds are also
named under theories of primary and secondary
liability.
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Recent Filings
• Baker v. Seaworld Entertainment, et al., 14-CV-2129MMA-JMA (S.D.Cal., Sept. 9, 2014).
• Waterford Township Police & Fire Retirement Sys. v.
Regional Management, et al., 14-CV-03876-LTS
(S.D.N.Y., Nov. 24, 2014).
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Coverage Issues
• Definition of Loss
• Allocation issues
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Cyber Liability
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SEC OCIE Cybersecurity Initiative
Private equity firms host sensitive data
Private equity is a prime target
Firms should consider purchasing a standalone cyber
liability product to cover first-party losses
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M&A Litigation
• Going private “inadequate consideration” litigation
• Less frequency as a result of fewer number of going
private deals.
• Still, when big deals are announced, litigation is
certain to follow (i.e., Petsmart, Riverbend and Tibco
Software)
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M&A Litigation
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Coverage Issues
• Definition of Loss
• How broad is your policy’s “bump-up”
exclusion (if your policy has one)?
• Allocation issues
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Portfolio Company Derived Liability
• Bankruptcy Adversary Proceedings
– Fraudulent transfer allegations
– Direct breach of fiduciary duty and aiding and abetting
claims resulting from actions taken during the “zone of
insolvency”
– Coverage issues involve loss definition, allocation and
fraud/dishonesty exclusion
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Portfolio Company Derived Liability
• “Deep Water Horizon”
– Many private equity firms heavily involved in energy
sector
– Liability is predicated on alter ego and general agency
principles
– How broad is your policy’s pollution exclusion?
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Portfolio Company Derived Liability
• Employment Practices/Breach of Contract Claims
– WARN/FLSA
• How broad is the policy’s exclusion?
– ERISA pension contribution claims
• Does the policy’s exclusion preclude claims at the portfolio
company level?
– Tortious interference with contract (both employment
and otherwise)
• Subsumed within the scope of the breach of contract exclusion or
not?
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Questions
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Panelist Contact Information
M. Machua Millett
Senior Vice President
Marsh USA, Inc.
[email protected]
Jennifer C. Hickox, RPLU
Vice President
HCC Global, Inc.
[email protected]
Jeremy Salzman, Esq.
Moderator – Elan Kandel, Esq.
Assistant Vice President
Arch Insurance Company
[email protected]
Member
Cozen O’Connor
[email protected]
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Thank You Diamond Sponsors
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Thank you for your time.
A replay of this webinar will be available to
PLUS Members at: www.plusweb.org
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