DealLawyers.com Blog

Here’s an excerpt from this blog by Pillsbury’s Peter Gillon and Alexander Hardiman:

Recently, we have seen insurers assert the price change exclusion as a potential defense to coverage at the most critical moment: just when the litigants are seeking to settle shareholders’ breach of fiduciary duty claims against the directors and officers. The result has been to inject several complicating factors into the already difficult process of litigating and settling these claims. One factor is that the exclusion generally does not apply to defense costs, and therefore the insureds may be incentivized to continue litigation – particularly because after the merger closes, the parties in charge of the litigation (the executives of the acquirer), are unlikely to be in the cross-hairs of discovery and unlikely to be as concerned with the burden of litigation as the target’s former directors and officers.

Another factor is that pre-closing, the remedies may include increased disclosures and other non-monetary consideration, which may justify Plaintiffs’ attorneys’ fees, which are generally covered. For claims being litigated after the merger closing, settlement becomes more difficult, as non-monetary settlement terms are frequently no longer available as settlement tools, and directors’ monetary payments may be non-indemnifiable. (As in other derivative claims, Side A DIC coverage may drop down and fill in any coverage gaps).

Fortunately, policyholders have numerous avenues to challenge insurers’ assertion of the price change exclusion with respect to breach of fiduciary duty claims. First, because the exclusion requires that “the [acquisition] price or consideration is effectively increased” to be triggered, the exclusion should not apply unless there has in fact been an increase in the price paid for the acquisition as a result of the merger objection lawsuit.

Thus, for example, a settlement of a pre-merger closing suit which consists of increased disclosures and other non-monetary relief, plus plaintiffs’ attorneys’ fees, would not fall within the exclusion. Similarly, claims based on Sections 14(a) and 20 of the Securities Exchange Act, which typically seek damages for alleged misrepresentations or omissions in a proxy filing, would not implicate the exclusion because they do not seek a change in the acquisition price.