DealLawyers.com Blog

This D&O Diary blog from Kevin LaCroix discusses last week’s decision from the Delaware Superior Court in MSG Networks v. Federal Insurance Co. (Del. Superior; 6/26) that a policy’s ‘bump-up’ provision precluded coverage for the settlement of a shareholder suit related to the acquisition of Madison Square Garden Networks. The bump-up provision read as follows:

Loss does not include any portion of such amount that constitutes any:  … (3) amount that represents, or is substantially equivalent to, an increase in the consideration paid (or proposed to be paid) in an acquisition  (or proposed acquisition) of more than 50% of the outstanding securities or other ownership interest of an entity, including an Organization, or in the right to vote for election of, or to appoint, more than fifty percent (50%) of the directors or limited liability company managers or members, or the equivalent of such positions, of an entity, including an Organization; except for any amount otherwise covered under Insurance Clause (A).

Madison Square Garden Networks had settled two shareholder suits related to the merger, alleging that the merger process was unfair and that their stock was undervalued in the transaction. After the insurers argued that the “bump-up” precluded coverage, Madison Square Garden Networks brought this action, seeking a judicial declaration that the settlement amounts were covered by its D&O insurance.

Judge Wallace first determined that the settlement represents both an increase in consideration and the substantial equivalent of an increase of consideration. In concluding that the settlement amount represents an increase in consideration, Judge Wallace considered four factors: (1) the Settlement’s language; (2) indications that the Settlement amount represents consideration for an inadequate deal price; (3) the stage of the litigation at the time of the settlement; and (4) the settlement class’s composition. Judge Wallace found that each of these factors supported the conclusion that the settlement represented an increase of the deal consideration, though also noting that “none are dispositive.” [. . .]

MSGN had tried to argue that the settlement agreement itself stated that the parties had settled solely to avoid the costs and burden of litigation. Judge Wallace said that this “doesn’t wholly foreclose the conclusion that the Settlement represented an increase in consideration.” Judge Wallace also noted that the shareholders had, in fact, sued for an increase in consideration, and that the class that received the benefit of the settlement consisted exclusively of persons who sought an increase in consideration. Judge Wallace noted that “upon a hard look at what the Settlement represents, the Insurers have shown it constitutes an increase in consideration.”

Judge Wallace also concluded, consistently with the Delaware Supreme Court’s opinion in its recent Harman decision, that the reverse triangular merger transaction was an “acquisition” within the meaning of the Bump-Up provision, as it is “an acquisition effectuated via a merger mechanism.” MSGN had tried to argue that the transaction was not an acquisition, because the Dolans controlled both companies before and after the transaction, and therefore there was no change in control. Judge Wallace rejected this argument because it depended on a “change in control” requirement that was not in fact in the Bump-Up provision.

These cases don’t always come out this way, as Kevin notes, even with the same judge.

As I noted at the outset, the potential preclusive effect of the Bump-Up provision may be one of the most hotly and frequently contested issues in the world of D&O insurance coverage. The provision is so frequently disputed for several reasons: the amount of money at stake is often huge; and the transactions involved are often highly complex, allowing room for the parties to argue about what the transaction represented. Moreover, there is almost always an argument about what the underlying settlement represents – is it really an increase in consideration?

That means, Kevin concludes, that “the outcome of a Bump-Up dispute is going to be a reflection of the policy wording, the deal structure, and the governing law.”

– Meredith Ervine