Shareholders and Investors Get Sue-Happy Over IPO

Story first appeared in Bloomberg Businessweek.
Investor lawsuits filed in the wake of share sales by Groupon Inc. and Deutsche Telekom AG are boosting the appeal of insurance for public offerings.

Almost 19 percent of the 3,510 initial public offerings on a U.S. stock exchange between 1996 and 2009 were defendants in at least one U.S. securities class-action, according to Cornerstone Research. Groupon, the biggest online coupon company that has slumped by more than half since its November IPO, is being sued by an investor after the firm reported a “material weakness” in its financial controls on March 30.

Shareholders have been getting more trigger-happy in suing companies for damage claims. Therefore lawyers that help prepare an IPO are typically recommending IPO insurance to their clients.

While the IPO market hasn’t returned to 2007 levels, this month’s landmark offering by Facebook Inc. may kick-start sales shelved amid Europe’s debt crisis. That may boost the $1 billion IPO insurance market as insurers, including Allianz SE, Zurich Insurance Group AG  and Chubb Corp., sell more protection to firms, their executives and bankers against claims relating to mistakes in prospectuses and marketing presentations.

Demand for IPO insurance is on the rise again. A successful major IPO, such as Facebook, could open the door for other share sales, if the European debt crisis remains under control.

Biggest Internet IPO

The Facebook CEO met with would-be investors on May 7 ahead of an IPO planned for later this month. The social networking site plans to raise as much as $11.8 billion, the biggest ever IPO for an Internet company.

The vast majority of share sales have prospectus liability insurance, said Jochen Koerner, a member of the executive board in Germany and Austria at Marsh & McLennan Cos., the world’s second-biggest insurance broker.

Sellers as well as other parties involved need to make sure they are covered for more litigious shareholders and a higher complexity of risks that need to be addressed in the IPO prospectus. There have been an increasing number of requests for information on IPO insurance.

The market for IPO insurance is $1 billion globally or even more.

Policy Prices

As with directors and officers insurance, Public Offering of Securities Insurance doesn’t cover fraudulent behavior. The price of the typically three to six-year policies ranges from 0.4 percent to 10 percent of the amount covered, depending on the assessed risk, according to insurers surveyed by Bloomberg.

Sky Deutschland AG expects its prospectus and D&O policies will cover shareholder damage claims relating to offering documents for its 2005 IPO and 2007 capital increase, according to the German Pay-TV broadcaster’s 2011 annual report. The firm controlled by Rupert Murdoch’s News Corp. also expects any associated cost, in particular legal costs to be covered by insurers, Sky said in the report.

Sky agreed to a 14.5 million-euro ($19 million) settlement with institutional investors in October 2010.

Exposed Moment

About 50 insurers offer IPO coverage with five or six market leaders. Since most companies limit their individual IPO coverage to 25 million euros, larger share sales are covered by a group of insurers for as much as 300 million euros.

An IPO is a highly exposed moment in the life of a company and that needs to be covered. A lot of IPOs that were put on hold over the last years are now being revisited, which could boost demand for IPO insurance.

RAG Stiftung, majority owner of Evonik Industries AG, said on March 23 it plans an IPO of the chemical maker in the first half, after shelving the offering last year.

Rheinmetall AG, the maker of KS Kolbenschmidt engine pistons and a partner in Germany’s Puma battle tank, will sell shares in its automotive division in the first half of this year to focus on its defense business. Rheinmetall declined to comment on whether the company will buy IPO insurance.

Deutsche Telekom Case

Deutsche Telekom AG, Europe’s second-largest phone company, is being sued by about 17,000 investors over its sale of 200 million shares in a third public offering in 2000.

Investors are seeking about 80 million euros as they claim that Deutsche Telekom’s share sale prospectus contained dozens of mistakes. They allege Deutsche Telekom improperly reported the value of real estate and didn’t in a timely way disclose its intention to acquire U.S. phone company VoiceStream in 2000.

The Frankfurt Higher Regional Court has scheduled a ruling for May 16. Deutsche Telekom declined to comment.

Groupon was sued on April 3 by an investor, who alleged that the deal-of-the-day coupon company’s officers, directors and underwriters misled investors about its business performance prior to its IPO.

Every company involved with the public offering of securities is liable for the information it discloses and provides to potential investors. It is a cyclical product, when the economy recovers, you see more IPOs which will automatically lead to more IPO insurance.


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