Delaware Supreme Court Upholds D&O Insurance Coverage in Landmark Decision

In a recent ruling, the Delaware Supreme Court upheld coverage under Directors and Officers (D&O) insurance for a $28 million settlement related to a securities class action lawsuit. The court determined that the "bump-up" exclusion did not apply, providing critical guidance for companies seeking insurance coverage for litigation stemming from mergers and acquisitions. This landmark decision has significant implications for regulatory compliance requirements and risk management within the insurance industry.

Case Background

The litigation originated from a 2017 transaction involving the sale of a public company configured as a reverse triangular merger. Post-merger, a class of shareholders initiated a lawsuit alleging misleading statements in the proxy materials, violating Sections 14(a) and 20(a) of the Securities Exchange Act of 1934. The case concluded with a $28 million settlement for the plaintiffs. The company sought compensation under its D&O insurance, which provides over $40 million in coverage. However, insurers denied the claim, citing the bump-up exclusion that applies to claims suggesting the acquisition payment was inadequate.

Delaware Supreme Court Decision

The Delaware Supreme Court's decision supported the lower court's verdict in favor of the policyholder. During the appeal, insurers acknowledged coverage under the D&O policies, with the main issue revolving around the bump-up clause exclusion. The Court's analysis involved determining if the claim alleged inadequate consideration and if the settlement increased the purchase price.

Inadequate Consideration Allegation

Insurers argued the lawsuit inherently alleged inadequate consideration, invoking the bump-up exclusion. However, the company highlighted risks beyond price inadequacies, including transaction process flaws. The Supreme Court agreed, noting the underlying allegations focused more on procedural deficiencies.

Effective Increase in Consideration

For the settlement to be considered an increase in deal consideration, insurers needed to demonstrate compensation for alleged price discrepancies. The company argued the settlement addressed broader compensatory damages, including legal fees. The Supreme Court concluded the settlement did not effectively increase deal consideration.

Industry Implications

This decision underscores key considerations for D&O policyholders, particularly concerning bump-up exclusions in M&A litigation. Insurers must ensure clarity in policy language, and companies should review their policies to understand potential exclusions. Delaware's pro-coverage stance influences insurance litigation standards, aiding policyholders in coverage negotiations and legal defenses.

In conclusion, a thorough understanding of insurance policy exclusions and regular policy reviews are essential for corporate policyholders navigating complex M&A transactions. This ensures they can effectively utilize their insurance to manage the financial impacts of litigation settlements.