Delaware Superior Court Holds that Appraisal Actions Not Securities Claim “For a Wrongful Act”  

In a victory for Wiley’s client, Judge Abigail LeGrow of the Delaware Superior Court has held that an appraisal action did not constitute a claim “for a Wrongful Act” as required by a D&O policy. Jarden, LLC v. ACE Am. Ins. Co., 2021 WL 3280495 (Del. Super. Ct. Jul. 30, 2021). Wiley represented one of the insurers that filed the motion to dismiss granted by the court.

After the insured underwent a merger, its dissenting stockholders filed an appraisal action asking the court to determine the fair value of the company’s shares at the time of the merger. The insured sought coverage for the appraisal action from its corporate liability insurance carriers for defense costs and interest incurred in connection with the appraisal action. In the ensuing coverage litigation, the insurers filed a motion to dismiss the case on the grounds that there was no coverage for the appraisal action because, although it was a “securities claim,” it was not made “for a Wrongful Act.” Even if it was, they argued, the only “Wrongful Act” here—the merger itself—occurred after the Policy’s run-off date, thus barring coverage for the action.

The court sided with the insurers and granted the motion to dismiss. First, the court accepted the insurers’ position that the policies’ requirement that a claim be made “for” a “Wrongful Act” meant that the claim “must seek redress in response to, or as a requital of that act.” The court observed that appraisal actions are “creatures of statute” that are “neutral in nature” and that do not “involve any inquiry into claims of wrongdoing.” The court noted that “the only issue before the appraising court is the value of the dissenting stockholder’s shares on the date of the merger.” For those reasons, the court determined that “an appraisal proceeding is not one that seeks redress or reprisal for any ‘act’ of the insured corporation,” and therefore is not a claim “for a Wrongful Act.”

Second, the court held that, even if an appraisal action was a claim “for a Wrongful Act,” coverage for the appraisal action was still barred because the “Wrongful Act” occurred before the Policy’s run-off date. The court determined that, when it comes to appraisal actions, the “Wrongful Act” at issue is the merger itself, which occurs on the date the merger closes because “without the merger’s execution, no appraisal rights exist,” and because “if the merger had not closed, none of the dissenting stockholders who submitted Appraisal Demands would have had standing to pursue appraisal.” In deciding that the date for a “Wrongful Act” in an appraisal action is the merger’s closing date, the court emphasized that appraisal actions cannot be filed until a merger is executed, and that the fair value ascribed to the shares in the appraisal action is the fair value as of the merger’s effective date. Accordingly, the court concluded that “if the Appraisal Action was for any act, the only act from which it arose or for which it sought redress was the merger’s execution.”

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