Buzz Archive:
PE Buzz: Section 11 Damages May Not Be 'Losses' Covered By The D&O policy--CNL Hotel and Resorts

by Joseph W. Bartlett, Founder of VC Experts.com, 5/31/2007

As and when a private equity fund approaches a public company with a buyout proposal, the Board of the public company is legitimately concerned at the prospect of litigation from professional plaintiffs' counsel. The company is in "play" under the Revlon rule and missteps can be lethal when the ingenuity and the appetite of the plaintiffs bar is in full flower. The Director defendants, quite naturally, reach for the D&O coverage.

A new concern, however, is stimulated by a decision by the US District Court in Orlando, Florida, on March 14, 2007, in a case involving CNL Hotel and Resorts. CNL was sued in a class action and the violations were, unfortunately, for the defendants, alleged to be violations of Section 11 of the `33 Act, with the registrants offering documents containing "materially misleading" statements. For purposes of this note, the cause of action could be Rule 10b-5 of the '34 Act, as long as the plaintiffs are disappointed investors or lenders claiming the defendant(s) misappropriated their money.