DealLawyers.com Blog

Many D&O policies include “bump-up” exclusions that can come into play when a buyer increases the price to be paid in an acquisition in response to litigation challenging the deal. Earlier this year, Meredith blogged about a federal court’s decision holding that a “bump-up” exclusion in a D&O insurance policy resulted in the loss of coverage for the target company’s directors.

A recent Cooley blog reviews case law from various jurisdictions addressing the applicability of the bump-up exclusion.  It concludes that determining whether the exclusion applies to a particular settlement depends on the wording of the exclusion, the structure of the underlying deal, and the law of the jurisdiction governing the policy.  This excerpt addressing the Delaware Superior Court’s decision in litigation between Viacom and its insurer illustrates the importance of both policy terms and deal structure in determining whether the exclusion applies:

In 2023, in Viacom Inc. v. U.S. Specialty Insurance Company, the Delaware Superior Court again applied Delaware law and held that the bump-up exclusion did not apply to the settlement of a post-close lawsuit because the underlying deal did not qualify as an “acquisition” under the terms of the exclusion. The bump-up exclusion at issue stated that covered “Loss” did not include:

any amount representing the amount by which the price of or consideration paid or proposed to be paid for the acquisition or completion of the acquisition of all or substantially all of the ownership interest in, or assets of, an entity, including [Viacom], was inadequate or effectively increased.

The court noted that the underlying transaction was an all-stock merger between Viacom and CBS, at the close of which CBS owned all of Viacom’s assets, and Viacom shares were automatically converted into CBS common stock, with former Viacom shareholders owning approximately 39% of CBS outstanding common stock.

After examining the bump-up exclusion, the court determined that it was ambiguous. While the merger qualified as an acquisition of Viacom by CBS under the ordinary dictionary definition of “acquisition,” other provisions in the D&O policy distinguished between a “merger” and an “acquisition” and treated them as distinct types of transactions. Because the exclusion was ambiguous – and Delaware law required ambiguity to be resolved in favor of the insured – the court held that the bump-up provision did not apply to the settlement of the post-close litigation commenced by former Viacom shareholders.

The blog warns that in light of this developing case law, carriers are expected to include broad bump-up exclusion provisions that will limit coverage in a wide range of M&A transactions, and recommends that M&A practitioners carefully review their clients’ D&O policies to appropriately counsel them on the likelihood that a claim will not be covered.

– John Jenkins