The Delaware Supreme Court upheld a ruling requiring insurers to pay a $28 mn directors and officers liability claim, rejecting the argument that a bump-up exclusion barred coverage.
The decision stems from coverage litigation tied to the 2016 acquisition of Harman International Industries by Samsung.
The deal used a reverse triangular merger structure. Samsung formed a subsidiary, Silk Delaware, which merged into Harman before Harman was folded into Samsung.
After the transaction closed, shareholders filed a securities class action alleging Harman issued a materially false and misleading proxy statement to win approval for what they said was an undervalued sale. Harman later settled the lawsuit and turned to its D&O insurers for coverage.
Insurance coverage was denied. Insurers, including units of American International Group and Chubb, relied on a bump-up exclusion.
The provision blocks coverage when a settlement effectively increases the price paid to shareholders after claims the deal consideration was too low.
The court split its analysis. A majority agreed the underlying lawsuit alleged inadequate consideration. That alone wasn’t enough. The exclusion also required the settlement to function as an increase in deal consideration.
The court said the settlement did not revise the merger price or require Samsung to pay more for Harman. As a result, the second condition of the exclusion wasn’t met.
“Because the bump-up provision requires satisfaction of both requirements, we affirm the Superior Court’s judgment that the bump-up provision does not exclude coverage of this settlement amount,” the majority wrote.
Policyholder advocates welcomed the ruling. Orrie Levy, a partner at Cohen Ziffer Frenchman & McKenna, who represented Harman, said the decision restores protection companies expect when buying D&O insurance tied to M&A risk.
Two justices dissented, arguing the settlement operated as an effective price increase and should have triggered the exclusion.
