This Bloomberg article about insurance disputes over “bump ups” caught my attention, so it’s another moment for me to step outside my (corporate) lane and pretend I know something about contracts (or insurance).
The issue is, lots of corporate managers have D&O coverage, and that coverage includes standard exclusions. Like, D&O insurance won’t cover willful acts of misconduct, that kind of thing, but it will cover settlement of such claims.
And it also includes an exclusion for “bump up” claims. That kind of claim is when the company sells itself to an acquirer, and the former shareholders sue alleging the consideration was inadequate. If there’s a settlement – or I guess an adjudication that doesn’t fall into the willful category – for bumping up the consideration paid to shareholders in an acquisition, the insurer is not obligated to cover it.
That’s led to a lot of litigation over what kinds of settlements/claims are excluded, and what are not, and insurers come out on the short end of the stick. For example, in Harman Int’l Indus. Inc. v. Ill. Nat’l Ins. Co., a Delaware Superior court held that Section 14 claims for a false proxy statement issued in connection with a merger are not excluded by the “bump up” provision – i.e., insurance is responsible for those claims. In 2023, a Delaware Superior Court held that the bump up provision did not apply – and claims were insured – against Viacom’s directors, in connection with CBS’s acquisition of Viacom. The theory was that the insurance contract was ambiguous as to the types of transactions covered and ambiguity was construed in favor of the insured.
In the Bloomberg article, unsurprisingly, “Policyholder attorneys were united in their view that shareholder litigation following M&A transactions should fall within the scope of coverage.” One attorney opined, “here is a problematic gulf between the coverage that they believe they purchased based on the plain language of these policies and the positions that certain insurance companies are taking when the insurance actually is needed.”
Okay but here’s the thing.
Let’s say Acquirer Company strikes a deal to buy Target Company. Let’s say, arguably, the directors and officers of Target sold for too low a price, and shareholders of Target sue.
The defendants, one way or another, are likely to be indemnified by Target – so, especially if there’s a settlement, damages aren’t actually paid by directors, they’re paid by Target, which means ultimately they’re paid by the Acquirer.
Think about the incentives here. It’s almost better if directors arguably breach their fiduciary duties and agree to a lowball price. In the absence of insurance, the worst that happens is, there’s a lawsuit, and Acquirer pays what it should have paid originally. In the best case scenario, though, insurance kicks in, pays the excess, and now part of the purchase price can be offloaded on to the insurer. The insurer, in other words, can be counted on to finance the purchase.
That, I assume, is why insurers exclude bump ups from coverage: to prevent Acquirers from forcing insurance to help finance their deals.
So if that’s right, it should inform how courts evaluate the scope of the exclusion. Rather than fall back on standard canons like, insurance contracts are construed against the insurer, I think courts should think about what’s being incentivized here, and why the exclusion exists in the first place. If ultimately the insurer is being asked to pay for the fair value of Target – value that is now accruing to the Acquirer, which is the real party in interest – the insurer should win.
And another thing: In this week’s Shareholder Primacy podcast, Mike Levin and I talk about the Fifth Circuit decision striking the NASDAQ diversity rules, and about the services proxy advisors provide to corporations. Available here on Spotify, here on Apple, and here on YouTube.