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Noting Possible Distinction Between Acquisition And Merger Transactions, Delaware Court Deems Bump-Up Exclusion Ambiguous (Insurance Law Alert)

09.29.23

(Article from Insurance Law Alert, September 2023)

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Holding

A Delaware trial court granted a policyholder’s motion for partial summary judgment, ruling that a bump-up exclusion was ambiguous and must be construed narrowly in favor of coverage. Viacom Inc. v. U.S. Specialty Ins. Co., 2023 Del. Super. LEXIS 728 (Del. Super. Ct. Aug. 10, 2023).

Background

In 2019, Viacom merged with CBS Corp. Pursuant to the merger agreement, Viacom ceased to exist as a corporation and all “assets, rights, privileges, powers and franchises” of Viacom vested in the surviving corporation, CBS. Additionally, all Viacom shares were converted into CBS common stock. Following this transaction, Viacom stockholders brought several lawsuits alleging breach of fiduciary duty against Viacom executives. In 2023, the suits were settled for approximately $122 million.

Viacom’s D&O insurers denied coverage for the settlement, arguing that coverage was barred by a bump-up provision which stated that covered loss did not include: “[A]ny 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 a Company, was inadequate or effectively increased.”

The court concluded that the exclusion was ambiguous with respect to the undefined term “acquisition” and therefore deemed it inapplicable.

Decision

The court’s ruling as to ambiguity turned primarily on its finding that merger and acquisition could be two distinct business transactions. The court noted that the language in other policy provisions relating specifically to mergers tracked the “acquisition” language contained in the bump-up exclusion, but also contained explicit reference to “or the merger or consolidation of the Company into or with another entity.” The court reasoned that the absence of such references to merger in the bump-up exclusion raised doubt as to whether it was intended to apply only to acquisition transactions.

The court acknowledged that one reasonable interpretation of the exclusion was that it applied to the Viacom-CBS merger because that transaction resulted in CBS’s acquisition of all Viacom’s assets, rights, privileges and franchises, as well as an ownership interest in Viacom’s subsidiaries. However, the court held that an equally plausible reading of the exclusion was that it applied exclusively to acquisitions, and not to merger transactions, such as the one at issue here. Having deemed the provision ambiguous, the court construed it in favor of coverage.

Comments

As reported in our May 2023 Alert, the Fourth Circuit reached a contrary conclusion in Towers Watson & Co. v. National Union Fire Ins. Co. of Pittsburgh, PA, 67 F.4th 648 (4th Cir. 2023). There, the Fourth Circuit reasoned that the “ordinary and accepted meaning” of “acquisition” contemplates the gaining of possession or control over something and therefore encompassed the transaction at issue—a reverse triangular merger. The Fourth Circuit stated that “nothing in the bump-up exclusion stipulates, or even hints, that the term ‘acquisition’ was intended to refer only to a particular form of acquisition.” The Viacom court distinguished Towers Watson based on its application of Virginia, rather than Delaware, law.