Strategic Defence Take-over Insurance (SDTI) was recently launched by Lloyd's in the US, offering companies coverage in the event of hostile bids and proxy contests. Companies purchase an option which guarantees the right to secure an insurance policy, in the event that a hostile bid is received by a target company. Insured companies are reimbursed for direct costs associated with a hostile bid. The costs include expenditures on investment bankers, public relations/ advertising firms, legal advisers, proxy solicitation costs, and printing and mailing costs.
When a hostile bid is received, the target company can trigger the coverage to protect its position. However, before that point is reached, companies could find the option itself to be a valuable strategic tool, especially in the case of a smaller public company in an industry which is consolidating.
SDTI is in addition to another Lloyd's product, known as Aborted Bid Cost Expense Reimbursement Insurance (ABCI). ABCI can be useful in negotiated or friendly transactions, and generally provides coverage triggers which include unanticipated regulatory intervention and effective withdrawal by the second party.
The ABCI policy generally identifies the agreed transaction in a schedule initially prepared by the parties. An example might be a merger of two public companies by way of plan of arrangement under either the OBCA or the CBCA. The agreed transaction is deemed to have started on the date negotiations commence between the insured company and the second party, and will be deemed to have terminated on the date of certain events. These may be termination of negotiations between the parties with respect to the agreed transaction, or on the date of termination of any letter of intent or agreement between the parties, or the occurrence of any act or declaration of termination by either party, whichever is earliest.
As with SDTI, ABCI covered expenses, include the fees and expenses of professional advisers, including investment banks and other financial advisers, accountants, lawyers, public relations consultants and proxy solicitation services. Break fees, payable by an insured to the second party as a result of the termination of the agreed transaction, are specifically excluded unless expressly identified and included by an endorsement to the policy.
We understand from Lloyd's that, while both SDTI and ABCI are being actively marketed in the US, with minimum premiums of $10,000 and coverage limits typically in the range of $5 million to $10 million, such policies have not yet been actively promoted in Canada. However, we also understand that at least one UK broker is prepared to work with the Lloyd's syndicates to arrange cover for interested Canadian public companies.