In light of today’s SpaceX IPO, I thought I should address whether insurers are making a gigantic mistake writing D&O for the company (it has been reported that SpaceX is looking to buy a $200M tower). After all, Tesla famously had issues around Elon’s uninsurability leading him to have to indemnify his directors personally.
Given this, I bet longtime readers are expecting me to scream from the mountaintop that no insurer should dare to write D&O for SpaceX. But is there more to the story? Let’s investigate…
The Against Case
Let’s start with the cons:
E-L-O-N M-U-S-K.
That’s a pretty big con (pun intended?)! He does not play by the rules, seems to seek conflict and controversy, always pursues the nuclear option rather than settle, has huge conflicts of interest and related party transactions, etc.
He has had high profile shareholder suits over his compensation package at Tesla and his failure to disclose his purchases of Twitter before launching his acquisition offer.
Who would insure a company run by him?
Normally, nobody in their right mind. And if the risk profile of SpaceX were the same as at Tesla or Twitter, I would definitely be on the “con” side of the argument.
However, there are some interesting twists in the SpaceX IPO filing that make this decision a bit more nuanced.
The For Case
Terms and conditions are so important when writing an insurance contract. While the D&O contract terms offered by insurers may not differ drastically for SpaceX and other tech firms, that isn’t the full story here.
What’s more important is that Elon has changed the terms and conditions on his own! He has added some important governance features that are terrible for shareholders but, conversely, great for D&O insurers!
Let’s look at some of them:
Mandatory Arbitration
Below is the language regarding mandatory arbitration. This is a recent SEC change that you may recall I wrote about last year.
Elon is taking full advantage to remove the ability for shareholders to take a dispute to court and instead force them to submit to arbitration. This will have a dampening effect on severity (and likely frequency as well). So chalk up one positive for writing SpaceX’s D&O!
Derivative Suits
This is a smaller win for SpaceX’s insurers but they have eliminated the tactic where plaintiff lawyers find a random joker with 100 shares to launch a class action. Now, only shareholders with more than 3% ownership can bring derivative suits.
When you consider that Elon and other insiders own 20% of the non-voting stock and index funds will likely own another 20% (and are highly unlikely to act on their own), that means one has to own 5% of the remaining float to be able to sue the company.
This, practically speaking, all but eliminates derivative suits. Basically, a large shareholder would have to have a feud with Elon (possible!) and hold their shares rather than sell (less likely).
Conflicts of Interest
This is a narrow provision but seems to address Elon’s annoyance that Tesla shareholders sued him when he acted in his personal interest to have Tesla buy SolarCity.
In other words, Elon can have as many conflicts of interest as he likes and nobody can sue. File this away for when Tesla and SpaceX eventually merge.
No Director Liability
This for me is the big one! I have never seen this before (likely because it has never happened before!).
Elon has declared his directors and officers unable to be held liable!!!
In other words, there can be no D&O losses! Well, unless that is, Elon says they weren’t loyal or didn’t act in good faith and lets them hang.
But, in the traditional understanding of D&O exposure – company does something “bad”, stock goes down, investors sue – SpaceX director and officers have no liability!
Furthermore, if lawyers find some workaround to this language, the company has agreed to indemnify the Ds and Os itself which reads to me as if they do not plan to collect from insurers.
The Verdict
So I think we have a pretty clear cut decision here. Insurers should absolutely write the SpaceX D&O program. They are being asked to take a modicum of risk compared to a standard treaty.
Even considering all the risk of adverse headlines from Elon being Elon, the actual exposure is very limited.
Of course, for every winner, there is a loser and if insurers have limited risk and SpaceX has limited risk, that means risk has been shifted to the shareholders who have limited mechanisms for recovery and limited voting rights to demand change.
But on the topic of should D&O insurers write SpaceX, my conclusion (presuming the rate on line isn’t a gigantic discount to normal market pricing) is a resounding YES!!!
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