Delaware Supreme Court Holds that a Bump-Up Provision Does Not Bar Coverage in Section 14(a) Case
The Delaware Supreme Court, applying Delaware law, held that a bump-up provision in a D&O liability program did not preclude coverage for the settlement of a proxy-related lawsuit by shareholders against the insured and its directors. Illinois Nat'l Ins. Co. v. Harman Int'l Indus., Inc., 2026 WL 204209 (Del. Jan. 27, 2026). The court held that the shareholders’ claim under Section 14(a) of the Securities Exchange Act of 1934 constituted a Claim alleging inadequate consideration. However, it held that the insurers did not show that the settlement amount represented an increase in deal consideration and that the bump-up provision did not apply.
The insured, an audio electronics company, disseminated proxy materials to its shareholders describing a proposed acquisition of the company (the “Transaction”). Its shareholders voted to approve the Transaction, under which each share of outstanding stock would be converted into the right to receive $112 in cash. After the Transaction closed, shareholders filed a putative class action lawsuit against the insured and its directors, alleging they disseminated a false and misleading proxy statement to induce shareholders to vote in favor of the Transaction in violation of federal securities laws. The parties settled for $28 million, and the insured sought coverage for the settlement under directors and officers liability policies. The insurers asserted that the primary policy’s bump-up provision barred coverage.
The bump-up provision stated, “[i]n 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.” The court outlined a two-step test for determining whether the bump-up provision applied. First, the underlying Claim must allege inadequate deal consideration for the Transaction. Second, the settlement amount must represent “the amount by which such alleged inadequate deal consideration was effectively increased.” The court found that the insurers satisfied the first step, but not the second.
First, the court held that the underlying Claim alleged inadequate consideration, disagreeing with the Superior Court’s reasoning that “inadequate deal price must be a viable remedy that was sought for at least one claim.” The Supreme Court declined to read such a “viability” requirement into the bump-up provision. The court concluded that, because allegations of inadequate consideration were “intrinsic to the theory of the Section 14(a) claim,” the first step was satisfied.
However, the court held that the insurers did not show that the settlement amount represented an increase in deal consideration. The court noted that “the composition of the settlement class was not limited to shareholders who received consideration in connection with the Transaction.” Rather, the settlement class included shareholders holding stock at any time from the date of the shareholder vote to the Transaction’s closing date and therefore may have included shareholders who sold their shares before the Transaction closed. The court also reasoned that “the parties settled before either party presented any evidence, such as an expert report, relating to the true value of the shares.” Specifically, the court noted that there was no evidence that the settlement amount represented the difference between the shares’ acquisition price of $112 and their true value. The court also cited evidence that the insured claimed its defense costs for continuing litigation would have been $25 to $30 million and reasoned that the insured likely settled to avoid the costs of further litigation. Because the court found that the insurers had not shown that the settlement represented an increase in deal consideration, it held that the bump-up provision did not preclude coverage.
