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
