D & O liability in cross-border M & A; As markets open to foreign capital, a new strain of international shareholder litigation is developing with potentially far-reaching effects on a company's directors and officers. Here's how to protect them.

• Author: Finz, David
• Position: BOARDS OF DIRECTORS - Directors and officers - Mergers and acquisitions

Globalization has fueled the drive for businesses to seek global synergies and value. This trend is continuing largely unabated, despite currency fluctuations, commodity shortages and geopolitical tensions.

In fact, the hyper-competitive nature of today's economic climate may only serve to provide further incentive for strategic mergers and acquisitions worldwide.

These transactions present challenges for companies attempting to provide insurance coverage for their senior managers and board members in markets where securities litigation may have been unheard of just a decade ago and where the regulatory regimes governing the placement of directors and officers liability (D&O) coverage are still being refined.

The following will examine some of the factors underpinning the concerns of executives operating in the global marketplace. It will then review some considerations for determining whether and what kind of D&O coverage should be purchased to protect the local subsidiaries of multinational corporations.

Rise in Global M&A

Whether measured in terms of the number of transactions or their monetary value, there has been a sharp increase in mergers and acquisitions across national boundaries over the past several years.

The United Nations Conference on Trade and Development, which has tracked cross-border transactions since 1987, reported nearly 7,000 purchases of companies by interests outside of the firm's "host" country in 2006, up from about 6,000 in 2005 and 5,000 in 2004.

The total deal value of these transactions was more than $880 billion in 2006, up from about $700 billion in 2005 and nearly $400 billion the previous year, according to UNCTAD.

Companies often pursue cross-border acquisitions as part of a strategy of acquiring competitors. A recent example of this was the announcement earlier this year by InBev NV/SA, a Belgian-Brazilian beverage concern, that it planned to buy U.S. brewer Anheuser-Busch Cos. Inc.

To some extent, a weak U.S. dollar has given European companies a favorable exchange rate to shop for acquisitions. Yet while American businesses are currently attractive targets, M&A traffic continues to flow both ways across the Atlantic.

Additionally, this decade has seen increased M&A activity in emerging markets such as China, India and Latin America, with firms from "developing" countries acquiring companies in more "developed" economies. For instance, Mexican cement maker Cemex SA de CV purchased British building...