Delaware Court Holds Bump-Up Clause Bars Coverage for Shareholder Settlement
In a win for Wiley’s client, the Delaware Superior Court, applying Delaware law, concluded that a so-called “bump-up clause” in a D&O policy bars coverage for a settlement paid to shareholders alleging that their shares were undervalued in the insured’s reverse triangular merger because the settlement “represents” or is “substantially equivalent to” an increase in consideration. MSG Networks Inc. v. Federal Ins. Co., C.A. No. N23C-01-103 PRW CCLD (Del. Super. Ct. June 11, 2026).
The insured combined with another entertainment company controlled by the same family in a stock-for-stock reverse triangular merger and became that company’s wholly-owned subsidiary. Following the transaction, shareholders alleged that the merger process was unfair and that their shares had been undervalued. The insured sought coverage for the settlement under its D&O insurance. The insurers denied coverage based on a carveout from the policy’s definition of “Loss” for any amount that represents, or is substantially equivalent to, an increase in the consideration paid or proposed to be paid in an acquisition of more than 50% of the outstanding securities or other ownership interest of an entity, or the right to vote for the election of or appoint more than 50% of the directors of an entity.
The court granted summary judgment in the insurers’ favor, determining that the settlement represented and was substantially equivalent to an increase in consideration. In concluding that the settlement “represents” increased consideration, the court applied the factors discussed in the Delaware Supreme Court’s decision in Harman International Industries, Inc. v. AIG Specialty Insurance Co., 2026 WL 204209 (Del. Jan. 27, 2026), including the settlement language, the nature of the shareholder claims, the stage of the litigation, and the composition of the settlement class. Although the settlement agreement recited that the insured settled to avoid the burden and expense of continued litigation, the court found that the settlement represented compensation for allegedly inadequate merger consideration based on other factors. The court noted that shareholders and the underlying Court of Chancery described the settlement as a meaningful recovery equal to an approximately 8.8% increase in consideration or premium to the deal price. The court also observed that the settlement amount largely corresponded with an alternative damages figure offered by the shareholders’ expert, that the shareholder class exclusively sought an increase in consideration, and that the case settled after substantial litigation activity and approximately one month before trial. The court concluded that “upon a hard look at what the Settlement represents, the Insurers have shown it constitutes an increase in consideration.” The court further determined that, not only did the settlement “represent” an actual increase in deal consideration, it was also “largely equal” to such an increase and therefore was “substantially equivalent” to increased consideration under the bump-up clause.
The court rejected the insured’s argument that there was no qualifying “acquisition” because the same controlling family ultimately controlled the relevant entities before and after the transaction, noting that the bump-up clause contains no change-in-control requirement. The court also noted that other courts have treated reverse triangular mergers as acquisitions.
The court further concluded that the bump-up clause barred coverage for plaintiffs’ attorneys’ fees and expenses awarded from the settlement fund. The court reasoned that, under the common fund doctrine, the fee award is fused into the settlement, and the entire amount represents and is substantially equivalent to an increase in consideration.
