Introduction – leadership under the spotlight
Leadership teams in cannabis companies operate in an environment of heavy regulation, demanding investors and fast changing markets. Strategic decisions about growth, financing, compliance and disclosure are constantly tested. When things go wrong, directors and officers are often named personally in claims and investigations.
D&O insurance for cannabis companies is built to protect the people who take these decisions and the organization itself from costly and complex legal actions.
The problem – personal exposure and talent attraction
Directors and officers owe duties to the company, its shareholders, creditors and in some cases other stakeholders. In the cannabis sector, these duties are examined particularly closely because of:
- Strict licence and compliance regimes.
- High investor expectations for growth and transparency.
- A relatively young industry that attracts public and media attention.
When allegations arise, directors and officers can face long investigations, regulatory proceedings and civil claims, even before any finding of fault. Without D&O cover, defence costs and potential settlements may have to be funded from personal assets.
The solution – cannabis focused D&O cover
A well structured D&O program for a cannabis company is designed to:
- Protect the personal assets of directors and officers when the company cannot indemnify them.
- Reimburse the company when it indemnifies its managers.
- In some cases, protect the company itself in securities and investor related claims.
Example scenarios
- Investor claim after share price drop – A cannabis company presented positive forecasts but later suffered regulatory setbacks and operational issues. The share price declined sharply. A group of investors sues the board, alleging misrepresentation and failure to disclose material risks. The D&O policy funds the defence and may contribute to settlement.
- Regulatory investigation – A regulator opens an investigation into possible breaches of licence conditions. The company and certain officers must respond to information requests, attend interviews and work with external counsel. D&O insurance helps with legal costs.
- Allegations of mismanagement – The company enters into several financing and acquisition deals that later prove problematic. Creditors and shareholders allege that the board failed to exercise proper oversight. D&O cover provides protection for defence costs and potential damages.
- Minority shareholder action – Minority shareholders challenge a strategic transaction, claiming conflicts of interest and inadequate process. They seek to hold individual directors responsible. The D&O policy responds to the defence of the board.
