DealLawyers.com Blog

This D&O Diary blog from Kevin LaCroix discusses an early March decision by the Eastern District of Virginia that a bump-up exclusion precluded D&O coverage for the $90 million paid by Towers Watson in settlement of claims relating to its January 2016 merger with Willis Group Holdings.

The bump-up exclusion provides as follows: “In the event of a Claim alleging that the price or consideration paid or proposed to be paid for the acquisition or completion of the acquisition of all or substantially all the ownership interest in or assets of an entity is inadequate, Loss with respect to such Claim shall not include any amount of any judgment or settlement representing the amount by which such price or consideration is effectively increased; provided, however, that this paragraph shall not apply to Defense Costs or to any Non-Indemnifiable Loss in connection therewith.” […]

In ruling on the motion, Judge Trenga addressed three specific questions concerning the applicability of the bump-up exclusion: (1) whether the underlying actions alleged inadequate consideration; (2) whether Towers Watson is “an entity” under the policy whose acquisition is covered by the exclusion; and (3) whether the settlements represent an effective increase in consideration for the merger. Judge Trenga concluded that the answer to each of these three questions is “yes.”

Kevin continues: “[F]or me, the interesting part of Judge Trenga’s opinion is the part where he concluded that Towers Watson is “an entity” with respect to which additional consideration paid for its acquisition is precluded under the policy. […] The court’s conclusion that the exclusion applies to the acquisition of Towers Watson itself (as opposed to Towers Watson’s acquisition of another company) for me highlights a recurring concern about the wording and application of the bump-up exclusion.”

Kevin suggests that bump-up policies shouldn’t operate this way — rather they shouldn’t be worded this way. And not all of them are:

The bump-up exclusion in many, if not most, of the policies available on the market operate so as to preclude coverage for amounts of increased merger consideration regardless of whether the insured company is the acquiror or the acquired entity. However, there is an alternative wording in at least some policies available on the market under which the exclusion only operates to preclude coverage for the payment of increased merger consideration if the insured entity is the acquiror; this alternative wording would not preclude coverage where, as here, the insured entity is the merger target.

Something to think about — if not now, when it is policy renewal time!

– Meredith Ervine