D&O Insurance Policy Does Not Cover Costs in Appraisal Proceeding

Theodore N. Mirvis and Ian Boczko are partners and Nicholas C.E. Walter is an associate at Wachtell, Lipton, Rosen & Katz. This post is based on their Wachtell memorandum and is part of the Delaware law series; links to other posts in the series are available here. Related research from the Program on Corporate Governance includes Using the Deal Price for Determining “Fair Value” in Appraisal Proceedings (discussed on the Forum here) and Appraisal After Dell, both by Guhan Subramanian.

The Delaware Supreme Court has held that D&O insurers are not required to cover costs incurred by a respondent corporation in an appraisal action. In re Solera Insurance Coverage Appeals, Nos. 413/418, 2019 (Del. Oct. 23, 2020). The en banc decision clarifies Delaware law on the scope of insurers’ responsibilities and reinforces that an appraisal action is a neutral proceeding that is “not designed to address alleged wrongdoing.”

In 2015, Solera entered into a merger agreement. After the closing, a group of dissenting stockholders petitioned for appraisal. In July 2018, the Court of Chancery found that the fair value of the petitioners’ shares was lower than the merger consideration they had been offered. Nevertheless, the petitioners were still entitled, by statute, to $38 million in pre-judgment interest. Solera sought to recoup this interest, plus attorneys’ fees, from its D&O insurers on the basis that it constituted a “Loss” resulting from a “Securities Claim,” which was defined in the policy as “any actual or alleged violation” of any statute, rule or common law.

The insurers sought summary judgment that they were not required to cover this claim. The Delaware Superior Court ruled that an appraisal proceeding constituted a Securities Claim because the alleged failure to pay fair value for a company’s shares constituted a “violation” of Delaware law. The Court nevertheless ruled that factual questions prevented summary judgment in the case.

The Supreme Court reversed. The Court held that appraisal does not involve any allegation of wrongdoing, as the word “violation” implies. Therefore, there was no “Securities Claim.” The Court noted that the purpose of an appraisal was to offer stockholders an independent valuation of their shares and reiterated that it should not be considered an ersatz action for breach of fiduciary duty — as plaintiffs’ lawyers have sometimes suggested.

The Solera decision comes shortly after a California trial court ruled that a “bump-up” exclusion permitted excess insurance carriers to avoid coverage of sums paid to settle a lawsuit against company directors. (See our memo here.) Together, the decisions indicate that company counsel should continue to pay close attention to the scope, and limitations, of D&O insurance in the merger context.

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