• Delaware Superior Court Holds That Bump-Up Exclusion In D&O Insurance Does Not Apply To Securities Claims Arising Out Of An M&A Transaction

  01/22/2025
  On January 3, 2025, Judge Paul R. Wallace of the Superior Court for the State of Delaware granted plaintiff’s motion for summary judgment in a directors and officers (“D&O”) insurance denial case against.  Harman Int’l Indus. Inc. v. Illinois Nat’l Ins. Co., 2025 WL 24364 (Del. Super. Ct. Jan. 3, 2025).  The Court found that the so-called “bump-up” exclusion, which excludes from coverage settlements that effectively increase a transaction’s value, was inapposite to a settlement of securities claims arising out of a transaction because the settlement did not increase the transaction price or deal consideration.
  
  Plaintiff alleged that its primary and excess D&O insurers wrongfully denied coverage for a settlement in a securities class action lawsuit arising out of plaintiff’s 2017 merger with a subsidiary of manufacturer of electronic components.  Defendants pointed to a “bump-up” exclusion in plaintiff’s insurance policies carving out settlements (or judgments) that would effectively increase the transaction’s value. 
  
  The Court explained that to satisfy the exclusion conditions, (1) the settlement at issue must be related to an underlying acquisition; (2) inadequate deal price must be a viable remedy that was sought in the underlying action; and (3) the settlement (or a portion of it) must represent an increase in deal consideration.  Regarding the first element, the Court found that the transaction qualified as an “acquisition” under the relevant “bump-up” provision because the buyer acquired 100% ownership of plaintiff, even though the transaction was effected through a reverse triangular merger, plaintiff retained a separate legal existence post-close, and only plaintiff’s shareholders voted to approve the transaction.  The Court held that the second element, however, was not met because inadequate deal price was not a viable remedy to claims alleging inadequate disclosures under Sections 14(a) and 20(a) of the Securities Exchange Act of 1934.  In so holding, the Court noted that an increase in deal price would not have remedied the alleged misconduct.  As to the third element, the Court determined that based on the factual record, no part of the securities action settlement represented an increase in the transaction price or consideration, and that plaintiff entered the settlement merely to avoid further litigation costs—not to “bump up” the transaction’s value.  The Court construed the “bump-up” exclusion narrowly, holding that only the amount of a settlement related to curing an allegedly inadequate deal price can be excluded under D&O insurance.
  
  The Court also briefly addressed plaintiff’s waiver and estoppel claims based on arguments that plaintiff relied on probable coverage during the five years it took for defendants to raise the exclusion.  The Court found plaintiff’s assertions unavailing, holding that plaintiff suffered no prejudice, and that those doctrines cannot be invoked to create an insurance contract where none exists, nor bring excluded risks or losses within an existing policy’s coverage.
  Category: D&O Insurance
  

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• Harman Int’l Indus. Inc. v. Illinois Nat’l Ins. Co.