DealLawyers.com Blog

We’ve blogged a few times about litigation surrounding insurers’ efforts to use “bump-up” exclusions in D&O policies to avoid coverage of amounts paid to settle merger claims. Last week, in Harman International Industries v. Illinois National Insurance, (Del. Supr. 1/25), the Delaware Superior Court rejected an insurer’s efforts to rely on such a policy provision to avoid coverage for a settlement of disclosure claims arising out of the sale of Harman to Samsung.

In reaching that conclusion, the Court acknowledged that the transaction, which was structured as a reverse triangular merger, involved an “acquisition” within the meaning of the policy. But it rejected the insurer’s claim that the settlement of a shareholder class action lawsuit alleging false and misleading disclosures in the merger proxy (the “Baum action”) involved an increase in the purchase price. This excerpt from a Hunton Andrews Kurth memo on the decision summarizes the Court’s rationale:

Harman contended that the settlement could not constitute an increase in inadequate deal consideration because a Section 14(a) claim can’t be used to obtain damages for inadequate consideration. The insurers disagreed, contending that the settlement had to represent an increase in deal price because the Baum complaint expressly sought damages equal to the difference between Harman’s true value and the price paid to the shareholders when the transaction closed.

The court acknowledged that the Baum action alleged inadequate consideration, but the court emphasized that damages for an undervalued deal were not a viable remedy under Sections 14(a) and 20(a) of the Securities Exchange Act of 1934. Rather, the court said those claims focus on the accuracy of the proxy statement’s disclosures and did not raise any claims authorizing the court to remedy an inadequate deal price.

Lastly, the court examined the settlement and concluded it did not represent an increase in the deal price. The insurers contended that the settlement resulted in an increase in consideration because the settlement amount was based in part on the alleged fair value of Harman stock compared to what Harman shareholders actually received.

Harman argued that the settlement represented only the value of legal expenses that it avoided by not litigating. The court looked no further than the agreement itself, which denied liability and stated the sole purpose of the settlement was to avoid litigation. The $28 million settlement price closely resembled the estimated legal fees and was not in line with the potential increased deal consideration, which the court estimated would be over $279 million. Therefore, the court concluded that the Baum settlement did not constitute an adjustment of the consideration offered to Harman’s stockholders to complete the acquisition.

The memo notes that the decision is particularly significant for policyholders incorporated in Delaware. The Delaware Supreme Court has said that Delaware law should apply to disputes involving D&O policies sold to Delaware-chartered companies, and the decision may provide an incentive for companies facing potential bump-up exclusion challenges to litigate coverage claims in the Delaware courts.

– John Jenkins