(Article from Insurance Law Alert, January 2025)
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Holding
A Delaware state court ruled that a bump up exclusion in a D&O policy did not bar coverage for an underlying settlement because the settlement did not represent compensation for an inadequate deal price. Harman International Industries, Inc. v. Illinois National Insurance Co., 2025 Del. Super. LEXIS 3 (Del. Superior Ct. Jan. 3, 2025).
Background
In 2016, Harman and Samsung Electronics announced a merger agreement. In 2017, a subsidiary of Samsung was created for the transaction and then merged with and into Harman through a reverse triangular merger. Ultimately, both companies survived with Harman as a wholly owned subsidiary of Samsung. Outstanding Harman stock was cancelled and converted into a right to receive cash, subject to certain exceptions.
Following this transaction, a class action complaint was filed against Harman and others alleging violations of Sections 14(a) and 20 of the Securities and Exchange Act of 1934. The suit alleged that Harman made false and misleading statements in order to secure shareholder approval for the transaction for which plaintiffs sought compensatory and/or rescissory damages. Among other things, the complaint alleged that the plaintiffs suffered losses reflecting “the difference between the price Harman shareholders received and Harman’s true value at the time of the Acquisition,” with the total loss amount to be determined at trial.
In 2017, AIG, Harman’s primary D&O insurer, agreed to reimburse Harman for its defense costs but reserved its rights as to indemnification. In 2021, AIG denied coverage based on a bump up exclusion. In 2022, the underlying suit settled for $28 million.
Harman sued AIG and two excess insurers, alleging breach of contract and seeking a declaration of coverage. The parties cross-moved for summary judgment and the court ruled in Harman’s favor.
Decision
The bump up exclusion provides:
In the event of a Claim alleging 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, Loss with respect to such Claim shall not include any amount of any judgment or settlement representing the amount by which such price or consideration is effectively increased; provided, however, that this paragraph shall not apply to Defense Costs or to any Non-Indemnifiable Loss in connection therewith.
The court explained that for the exclusion to apply, AIG must establish that (1) the underlying transaction was clearly and unambiguously an acquisition of all or substantially all an entity’s assets or ownership; (2) the underlying settlement is related only to the allegation of inadequate consideration; and (3) the underlying settlement represents an effective increase in consideration.
As to the first requirement, the court concluded that the reverse triangular merger was an acquisition for the purposes of the exclusion. The court noted that while the technical definitions of “merger” and “acquisition” may differ, the practical effect of the transaction at issue was Samsung’s acquisition of all or substantially all of the ownership interest of Harman. The court deemed it irrelevant that the transaction was labeled a “Merger Agreement,” emphasizing that it satisfied all the characteristics of an acquisition, including that Harman retained a separate legal existence after the transaction and that only Harman shareholders voted on the agreement, among other things.
However, the court ruled that neither of the remaining requirements for the exclusion to apply were satisfied. As to the second requirement, the court explained that for an underlying settlement to represent the amount by which the transaction price is effectively increased, an underlying claim must allege inadequate consideration in the first place. Here, the underlying action alleged violations of Sections 14(a) and 20 of the Exchange Act—neither of which provide for consideration of an inadequate deal price as a remedy (and both of which encompass broader allegations than inadequate consideration). The court deemed it irrelevant that the complaint requested inadequate consideration, emphasizing that “the court in the underlying action must also be authorized to remedy the inadequate deal price under the claims raised.”
Additionally, as to the third requirement, the court held that the settlement did not in fact represent an effective increase in consideration. According to the factual record, Harman expressly denied liability or wrongdoing, and the settlement was based “solely on the conclusion that further conduct of the litigation would be protracted and expensive.” And the amount of the settlement ($28 million) was squarely in the middle of the litigation cost estimate ($25-$30 million). The court noted that if the settlement was intended to represent compensation for an inadequate deal price, there would be some evidence that the settlement amount was “in some way commensurate” with the difference between the shares’ acquisition price and their true value, which was not the case.
In addition to the substantive rulings, the court also addressed the issues of waiver and estoppel. Harman alleged that AIG was precluded from denying coverage based on the five-year delay before raising the bump up exclusion as a basis for its coverage denial. Rejecting this assertion, the court stated: “This Court doesn’t recognize coverage via estoppel” because equitable doctrines cannot be used to bring risks within a policy’s coverage where the policy’s terms expressly provide otherwise.
Comments
This holding partially aligns with another recent Delaware trial court decision discussed in our September 2023 Alert, Viacom Inc. v. U.S. Specialty Ins. Co., 2023 Del. Super. LEXIS 728 (Del. Superior Ct. Aug. 10, 2023), in which the court granted a policyholder’s motion for summary judgment. There, the court ruled in favor of coverage, finding that a bump-up exclusion was ambiguous with respect to the undefined term “acquisition.” However, the Fourth Circuit reached a different conclusion in Towers Watson & Co. v. National Union Fire Ins. Co. of Pittsburgh, PA, 67 F.4th 648 (4th Cir. 2023). It reasoned that the “ordinary and accepted meaning” of “acquisition” contemplates the gaining of possession or control over something and encompassed a reverse triangular merger.