M&A and Restructuring

D&O Insurance When a Chinese Investor Withdraws

D&O Insurance When a Chinese Investor Withdraws

The Chinese investor withdraws — the next person in the firing line may be the director. The new buyer arrives hunting for faults in old decisions: overpriced contracts, “unexplained” expenses, missed tax duties — and sues the director for compensation. Directors & Officers (D&O) insurance is the shield for this riskiest phase. This article covers when it’s needed and how to buy it.

1. Why the exit phase is “lawsuit season” for directors

  • New owners scrutinise the past: buyers arrive in “fault-finding” mode to chip prices or claim damages — every old decision under the microscope;
  • Conflicts of interest: directors appointed by the Chinese investor served both company and investor — buyers may claim the director favoured the seller;
  • Unresolved duties: tax, environmental, labour — anything unfinished becomes lawsuit grounds;
  • Crossfire: seller-buyer disputes drag the director into the middle — each side wanting the director “on their side”.

2. Directors’ legal liability under Vietnamese law

Under Vietnam’s Enterprise Law 59/2020/QH14 (Article 165, amended by Law 76/2025/QH15), managers owe duties of care, loyalty and honesty, and must compensate losses caused by breaches:

  • Breach → personal liability to compensate the company;
  • Shareholders/members may sue managers derivatively (on the company’s behalf);
  • Liability survives resignation — past decisions remain actionable;
  • Limitation periods: mind the limitation clock — risks run years after exit.

3. What D&O insurance is and covers

D&O liability insurance is voluntary commercial insurance — the company (or the director personally) buys it so the insurer pays when directors are sued:

  • Legal costs: defence counsel — usually the largest item;
  • Damages: sums the director must pay the company/third parties (within cover);
  • Investigation costs: when authorities investigate matters touching the managerial role;
  • Not covered: deliberate illegality, fraud, personal profit — standard exclusions.

4. When to buy D&O in a divestment

  • Before announcing the exit: buy while calm — cheaper premiums, better terms;
  • Retroactive cover: the policy must cover past decisions — post-exit suits always target the past;
  • The transition period: from signing to completion — the highest-risk window;
  • Run-off cover: the “tail” — continuing protection for claims arising after the director leaves (typically 3–6 years);
  • If D&O exists: review whether scope covers the exit phase — never assume.

5. Who buys, who pays

  • Market practice: the company buys and pays — protecting directors (including Chinese-investor appointees);
  • Deal term: the seller (Chinese investor) may require the buyer to maintain D&O for former directors for X years — “tail coverage” clause;
  • Directors self-insuring: when the company won’t buy, directors (especially foreigners) should self-insure — small cost vs risk;
  • Premiums: depend on company size, sector, claims history — quote from multiple insurers.

6. Coverage scope: read the exclusions carefully

  • Common exclusions: fraud, deliberate illegality, personal profit, claims known before purchase;
  • “Known claims”: disputes known but undisclosed before purchase → insurer denies;
  • Limits and deductibles: maximum payout and retention — pick limits matching the risk scale;
  • Territory: claims in Vietnam only, or China/elsewhere too — Chinese directors may be sued in both;
  • Defence costs: inside or outside the limit — a major difference.

7. Typical post-exit lawsuit scenarios

  • Buyer sues former directors: alleging concealed bad debts or misvaluation — claiming the difference;
  • The company sues (buyer-controlled): derivative claims for losses from old decisions;
  • Tax authorities: back-taxes from the former director’s era — personal responsibility examined in some cases;
  • Counterparties/customers: suing over loss-making contracts the former director signed;
  • In every scenario: legal costs arise even when the director wins — D&O pays these.

8. Preventive measures alongside insurance

Insurance is the “life jacket” — but don’t jump in the water unnecessarily:

  • Document decisions: every material decision with valid minutes and resolutions — proving process compliance;
  • Independent opinions: major decisions (asset sales, large contracts) backed by independent advice — proving “care”;
  • Disclose conflicts: when conflicted, disclose and recuse from voting — per the law;
  • Full handover: on leaving, hand over files with minutes — avoiding “concealment” allegations;
  • Release agreements: in the transfer contract, the buyer waives claims against former directors for known matters — “lock” it if negotiable.

9. Chinese directors: specific risks

  • Language barrier: not fully reading signed Vietnamese documents — “I didn’t know” is no defence;
  • Two legal systems: suable in Vietnam (company role) and examinable in China (parent role);
  • Returning home: litigating in Vietnam from China is hard — needs local counsel;
  • Cross-border D&O: choose cover spanning both countries;
  • Advice: Chinese directors should have separate counsel (not shared with the company) at the first sign of disputes.

10. D&O checklist for the divestment

  • Does the company have D&O? Does scope cover the exit phase?
  • Retroactive cover purchased for past decisions?
  • Run-off/tail coverage negotiated for post-departure?
  • Exclusions read (fraud, known claims)?
  • Limits and deductibles fit the risk scale?
  • Territory includes China (for Chinese directors)?
  • Transfer contract requires buyer-maintained D&O?
  • Release agreement for former directors?
  • Decision records fully archived?

11. Side A, Side B, Side C: what the jargon means

D&O policies speak in “Sides” — understanding them prevents buying the wrong cover:

  • Side A: pays the director personally when the company cannot or will not indemnify (insolvency, legal prohibition) — the director’s last line of defence;
  • Side B: reimburses the company for indemnifying its directors — protects the company’s balance sheet, not the director directly;
  • Side C: covers the company itself for securities claims (shareholder suits alleging misdisclosure) — relevant for listed or bond-issuing companies;
  • What to buy: for exit protection, Side A is essential (the company may be buyer-controlled and hostile); Side B useful while the company is cooperative; Side C rarely needed for private JVs;
  • Dedicated Side A (DIC): a separate, director-only excess policy — worth considering when the main tower may be exhausted by company claims.

12. The claims process: when a director is actually sued

  • Notify immediately: policies require prompt notice — late notification is the #1 reason claims are denied. Notify the broker and insurer in writing;
  • Don’t admit liability: any admission or settlement without insurer consent can void cover — route everything through the insurer’s claims team;
  • Panel counsel: many policies require using the insurer’s approved law firms — or consent before appointing your own;
  • Document the claim: the writ, correspondence, board minutes — the insurer investigates before paying;
  • Keep paying premiums: coverage continues only while premiums are current — a lapsed policy at claim time is worthless.

Read the claims notification clause before buying — the best coverage in the world fails if the notification mechanics are missed.

Run-off cover essentials

Claims surface after the director leaves. Run-off cover is the safety net:

  • Duration: buy run-off for at least the limitation period of the likeliest claims — several years, not months;
  • Scope: confirm the run-off covers acts during tenure, not just claims filed during tenure;
  • Limit adequacy: the exiting director’s personal exposure sets the limit — not the company’s current size;
  • Premium: price the run-off before the exit is announced — leverage is highest then;
  • Certificate: the director keeps a personal copy of the run-off certificate — not just the company’s file.

Notifying the insurer of the change

Insurers treat undisclosed changes as coverage defences. Notify properly:

  • When: notify at signing of the transfer, not at closing — the risk changes when control is agreed;
  • What: disclose the new ownership and board composition — the insurer underwrote the old team;
  • Successor exposure: ask whether the policy covers claims by the new owner against former directors;
  • Written confirmation: get the insurer’s written acknowledgement — phone calls don’t bind;
  • Broker role: use the broker to negotiate continuity terms — they know the underwriter’s flexibility.

Contact us

FLAT Law Firm advises Chinese investors throughout the Vietnam investment cycle — from deal structuring and licensing to operations and compliance. Contact us for advice tailored to your project.

This article has been quality-reviewed by the FLAW AI Legal Council