A client calls and says, “Hey, why does it matter if someone owns over 10% of the company?”

At Garland-Sturges & Quirk, we have helped many startup companies obtain Directors & Officers Liability coverage.

Underwriters are looking for investors to have a sizable ownership in the company. Sizeable ownership will concern an underwriter for a couple reasons. If somebody had 25% ownership in a company and everybody else had 2% or 3%, what a D&O underwriter is worried about is: Does that shareholder have some kind of unreasonable amount of control over what the company does?

If you have 25% ownership, you probably have what’s called controlling interest of the company. So oftentimes, these applications will ask that question. Sometimes they’re concerned with ownership percentage as low as 5%.

Last year, Bobby and I wrestled with an issue where a client of ours had one big investor. From our capitalization table, we could see these guys put in two million dollars. The issue was that the underwriter was demanding that the shareholder become a board member. Now, why would the underwriter want that large shareholder to become a board member? Because that way the underwriter may avoid a loss.

The reason it works is because that’s what D&O coverage is designed to protect. It protects the directors and officers from, in this case, shareholders. So if that big shareholder is the director, he’s not going to sue himself because he’s the one directing the company.

That’s why underwriters get concerned with someone with a large ownership stake in the company. They’re afraid that it’s not being run and directed by the directors, it’s being run by a shareholder, and they’re not in a position to be able to hold the company accountable to do what it said it’s going to do. The workaround, or the way for the underwriter to protect themselves is to say, “I don’t like that. So I want to make that guy a director.”

Have an experienced agent from Garland-Sturges & Quirk help guide you through the process for this important protection.