Bump-Up Provision Bars Coverage for Settlement of Post-Merger Claims by Shareholders of Target Company

On remand from the U.S. Court of Appeals for the Fourth Circuit, the U.S. District Court for the Eastern District of Virginia, applying Virginia law, has held that a bump-up provision in directors and officers liability policies bars indemnity coverage for settlements of post-merger claims by shareholders of the target company because (1) the target company was “an entity” for purposes of the bump-up provision, and (2) the settlements “represent” amounts paid to “effectively increase” the consideration paid for the merger. Towers Watson & Co. v. National Union Fire Ins. Co. of Pittsburgh, PA, 2024 WL 993871 (E.D. Va. Mar. 6, 2024).

Following a merger between the insured target company and the acquiring company, the insured’s former shareholders sued the insured company alleging that the CEO had failed to disclose that he would receive a substantial compensation package if the merger closed. The shareholders of the target company filed a class action alleging violations of securities laws and a derivative action asserting common law breaches of fiduciary duties in connection with the insured company’s failure to disclose the conflict of interest.

The target company’s directors and officers insurers agreed to provide defense coverage but denied indemnity coverage for the resulting settlements based on the policies’ “bump-up provision,” which provided that “[i]n the event of a Claim alleging that the price or consideration paid . . . . for the . . . . acquisition of . . . . all the ownership interest in . . . . an entity is inadequate, Loss with respect to such Claim shall not include any amount of any . . . . settlement representing the amount by which such price or consideration is effectively increased.”

The insured initiated coverage litigation, and the trial court granted summary judgment in favor of the insured on the ground that the type of merger at issue was not an “acquisition” and therefore was outside the scope of the bump-up provision. On appeal, the Fourth Circuit disagreed and vacated the court’s order, finding that the merger did involve an “acquisition” in the ordinary meaning of the word, and remanded the case for further proceedings to consider (1) whether the insured constituted “an entity” for purposes of the bump-up provision and (2) whether the settlements “represent the amount by which . . . . consideration is effectively increased.”

On remand, the trial court held that the bump-up provision unambiguously applied to the settlements. First, the court determined that the underlying actions were “Claims” alleging that consideration for an acquisition was inadequate because the plaintiffs’ claims were based on alleged harmed resulting from the insured’s failure to obtain the best price for the shareholders in the merger. Second, the court concluded that the insured target company qualified as an “entity” for purposes of the bump-up provision based on the “ordinary and customary meaning” of the term. Third, the court determined that the settlements “represent” an amount by which consideration for the merger was “effectively increased” because, “at the end of the day, the former [target company] shareholders were paid additional monies because the amount they received in the merger was inadequate” since plaintiffs’ claims were “solely predicated on the theory that shareholders got less in the merger than [the target company] was worth.” Therefore, the court granted the insurers’ motion for summary judgment.  

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