October 29, 2020

D&O Insurance: Del. Supreme Court Holds Appraisal Not a “Securities Claim”

Last year, I blogged about the Delaware Superior Court’s decision in Solera Holdings v. XL Specialty Ins., (Del. Super.; 7/19), which held  that a D&O policy’s duty to defend “Securities Claims” extended to appraisal proceedings. Last week, the Delaware Supreme Court overruled that decision.

Central to the Supreme Court’s ruling was its conclusion that an appraisal action does not involve a “violation” of any federal, state, or local statute, regulation, or rule pertaining to securities, and therefore isn’t a “Securities Claim” as defined in the policy  Here’s an excerpt from Kevin LaCroix’s recent blog on the case:

In a unanimous October 23, 2020 opinion written by Justice Karen L. Valihura, the Delaware Supreme Court reversed the lower court, ruling that the appraisal action is not a claim for a “violation” and therefore that the appraisal action does not fall within the definition of a “Securities Claim.” The Supreme Court ruled further that because the appraisal action is not a securities claim and therefore is not covered under the policy, the remaining issues (that is, the questions relating to pre-judgment interest and pre-notice defense expenses)  are moot.

In concluding that an appraisal action is not a claim for a “violation,” the Court said that this conclusion is “compelled by the plain meaning of the word ‘violation,’ which involves some element of wrongdoing, even if done with an innocent state of mind.” It is also “compelled,” the Court said, “by section 262’s historical background, its text, and by a long, unbroken line of cases that hold that an appraisal under section 262 is a remedy that does not involve a determination of wrongdoing.” Appraisal, the Court said, that is “limited to the determination of the fair value of the dissenters’ shares as of the effective date of the merger or consolidation.”

Appraisal proceedings, the Court said, are “neutral in nature.” While courts may consider evidence relating to the price negotiation process leading to the signing of a transaction, “this evidence bears on the weight, if any to be accorded to the deal price.” Accordingly, appraisal decisions analyzing the merger process do not support the contention that appraisal actions adjudicate wrongdoing.”

Kevin points out that this case is a big win for insurance companies, but perhaps not quite as big as it would’ve been a few years ago, when appraisal cases were exploding in Delaware.

John Jenkins