(Article from Insurance Law Alert, November 2021)
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A Virginia district court granted a policyholder’s summary judgment motion, finding that a bump up exclusion did not unambiguously exclude coverage for underlying settlements and must therefore be construed narrowly in favor of coverage. Towers Watson & Co. v. National Union Fire Ins. Co. of Pittsburgh, PA, 2021 WL 4555188 (E.D. Va. Oct. 5, 2021).
Two suits were brought against the policyholder after it completed a corporate transaction. One suit alleged violations of the proxy solicitation rules of the Securities and Exchange Act and claimed that shareholders had received consideration lower than the true value of their shares based on omissions and misrepresentations in the proxy materials. The other, a consolidated shareholder derivative action, alleged breach of fiduciary duty based on the same factual allegations as the first suit. The insurers acknowledged that the actions were “Claims” under the relevant policies and agreed to advance defense costs. However, they denied coverage for the underlying $90 million settlements, arguing that a bump up exclusion applied. The court disagreed and ruled in the policyholder’s favor.
The exclusion barred coverage for judgments or settlements stemming from a claim 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.” The court concluded that ambiguity existed as to whether the transaction at issue, consummated through a merger, constituted an “acquisition” under the exclusion.
The court reasoned that an acquisition is commonly associated with “the takeover of one company by another, with both companies surviving the transaction, as opposed to a merger, which contemplates the combination of two companies into a single entity, with shared ownership by the shareholders of both participating entities.” Moreover, the court explained that the structure of the transaction at issue—a “triangular merger involving a qualified stock purchase”—was “hardly comparable to the straightforward takeover of one company by another suggested by the Bump Up Exclusion.” Finally, even though Virginia law governed the dispute, the court noted that Delaware corporate law recognizes a merger as a “distinct type of business combination, with procedural requirements and substantive law consequences dissimilar and distinct from other types of ‘acquisition techniques’ involving the transfer of stock or assets.”