Delaware Court Rejects Application of D&O Policy's "Bump-Up" Exclusion to Securities Claim Settlement

D&O insurance policies often contain—and insurers often attempt to rely on—"bump-up" exclusions. However, in a significant victory for policyholders, the Delaware Superior Court in Harman International Industries, Inc. v. Illinois National Insurance Company recently rejected a group of insurers' strained attempt to apply a bump-up exclusion to an underlying settlement that expressly represented the parties' attempt to avoid the costs of litigation and not increased consideration for an acquisition. 

Harman International and Samsung Electronics America, Inc. completed a merger in early 2017. Thereafter, Harman's former shareholders filed a class action complaint alleging that Harman had issued false and misleading proxy statements in violation of Sections 14(a) and 20 of the Securities Exchange Act in order to procure support for the Samsung acquisition, which the plaintiffs asserted was undervalued.

Harman settled the underlying securities action for $28 million, but its D&O insurers denied coverage, relying on their policies' "bump-up" exclusion. The bump-up exclusion stated, in relevant part, that: "In 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."

In the ensuing coverage litigation, the Delaware Superior Court rejected the insurers' reliance on the bump-up exclusion, concluding that the underlying settlement agreement did not, in fact, represent an increase in the price or consideration paid for the Harman-Samsung transaction. Although the underlying class action complaint had purportedly sought relief for an inadequate purchase price, the Delaware court held that such a bare allegation was insufficient to trigger the bump-up exclusion. Rather, to trigger the exclusion, the underlying causes of action asserted must actually allow for an increase in purchase price, which the Court determined was not an appropriate remedy for alleged violations of Sections 14(a) and 20 of the Securities Exchange Act.

The Delaware court further explained that no part of the underlying settlement represented an increase in the underlying transaction price. The court noted that: (i) the settlement agreement expressly stated that the parties were settling to avoid the cost of litigation; (ii) the $28 million settlement amount was within the estimated $25 to $30 million in remaining defense costs; and (iii) the alleged difference in the shares' actual value versus their deal value was almost $280 million—10 times greater than the settlement amount. 

In light of the Harman International decision, commercial policyholders should carefully review their D&O policy language in conjunction with the actual terms of any corporate acquisition and resist insurer efforts to apply and expand so-called "bump-up" exclusions beyond their terms.