In a highly anticipated decision, the Delaware Supreme Court closed the books on insurance coverage for appraisal rights litigation. In this guest-authored edition of the D&O Notebook, Woodruff Sawyer’s Scott Goettelman discusses the latest development. –Priya Huskins
M&A transactions are commonly accompanied by appraisal rights litigation. In appraisal rights litigation, a shareholder who voted against being acquired in an M&A transaction brings suit to ask a court to determine how much the shareholder should have received in the transaction. If this amount is more than what the shareholder received under the terms of the deal, the shareholder is entitled to this additional amount. The shareholder is also entitled to statutory interest, which can add up quickly.
Is this type of litigation covered under a D&O insurance policy? Recently, the Delaware Supreme Court reversed a lower court decision and concluded an appraisal rights litigation proceeding is not a “Securities Claim” within the definition of Solera’s public company D&O insurance policy. As a result, appraisal rights litigation is not a “covered” claim under a D&O insurance policy.
A Brief Recap
We previously discussed the lower court’s ruling and were quite bullish on its proclamations from an insurance policy holder perspective. However, we also recognized the Delaware Supreme Court would provide the final word.
Solera was publicly traded until a private company acquired it in March 2016 for $55.85 per share. Solera initially announced the transaction in September 2015. Upon hearing the news, several stockholders filed a class action merger objection lawsuit alleging breach of fiduciary duty. Management and Solera’s board ultimately prevailed in the merger objection suit when the Delaware Chancery Court dismissed the case.
Shortly after the deal closed in March 2016, several Solera shareholders filed a Delaware appraisal action suit seeking “fair value” for their shares. The stockholders claimed their shares were worth $84.65 a share. The appraisal action went to trial in June 2017. A year later the Court determined the fair value was $53.95 per share, which is to say less than the merger price negotiated by Solera’s board of directors. The Court ordered Solera to pay the shareholders $53.95 per share, plus $38.3 million in prejudgment interest. Solera also incurred $13 million in litigation costs to defend the appraisal action.
Solera tendered the appraisal litigation to its D&O insurance tower. A coverage dispute arose when the primary D&O insurer declined coverage. Solera sued its D&O insurers, seeking coverage for the prejudgment interest and defense expenses incurred in the appraisal action.
On July 31, 2019, the Delaware Superior Court issued its opinion in the Solera coverage dispute litigation and answered three questions in the affirmative. (1) Is an Appraisal Action is a Securities Claim under a public company D&O insurance policy? (2) Does the Solera policy provided coverage for pre-judgment interest on the appraised share value? and, (3) Does the “Notice Prejudice Rule” apply if a policy holder fails to seek consent for pre-tender defense costs.
Subsequently, the insurers appealed.
An Appraisal Rights Proceeding is not a “Securities Claim” within the Definition of Solera’s Public Company D&O Insurance Policy
Like many companies, Solera purchased a D&O insurance program that had a “primary layer” of insurance and several excess layers of insurance from different insurance carriers. Solera’s excess policies were follow-form policies, which simply means the language of the primary policy controlled the availability of coverage under the excess policies.
The XL Specialty primary D&O policy defined “Securities Claim” to mean a claim:
made against [Solera] for any actual or alleged violation of any federal, state or local statute, regulation, or rule or common law regulation securities, including but not limited to the purchase or sale of, or offer to purchase or sell, securities, which is: (a) brought by any person or entity resulting from, the purchase or sale of, or offer to purchase or sell, securities of [Solera]; or (b) brought by a security holder of [Solera] with respect to such security holder’s interest in securities of [Solera].
The Delaware Supreme Court reversed the lower court’s decision and concluded an appraisal action is not a claim for a “violation,” and, as a result, does not trigger the policy’s “Securities Claim” definition. Because an appraisal action is not a “covered” securities claim under the policy, the Delaware Supreme Court did not address the remaining issues concerning pre-judgment interest and pre-tender defense costs.
Key Takeaways from an Insurance Coverage Perspective
Legislative Intent Matters
The Court emphasized its conclusion was “compelled by the plain meaning of the word ‘violation,’ which involves some element of wrongdoing, even if done with an innocent state of mind.”
Moreover, “[S]ection 262 [of the Delaware General Corporation Code]’s) historical background, its text,), and by a long, unbroken line of cases that hold that an appraisal under section 262 is a remedy that does not involve a determination of wrongdoing.”
Finally, appraisal proceedings are “neutral in nature” according to the Court. Even though courts can consider evidentiary proof concerning the sales negotiation process preceding an executed transaction, “this evidence bears on the weight, if any to be accorded to the deal price.”
Importantly, the Court emphasized appraisal rulings scrutinizing the merger process do not support the assertion “appraisal actions adjudicate wrongdoing.”
The Delaware Supreme Court decision is certainly a win for D&O insurers. However, this decision may not be that consequential to policy holders because appraisal actions have steadily been on the decline over the past several years.
Delaware May Be Becoming a More Insurance Carrier Friendly Jurisdiction
Until recently, many practitioners a considered the Delaware Superior Court as a policyholder-friendly judicial forum to resolve insurance coverage disputes. This may no longer be the case given that the Delaware Supreme Court’s reversal of two recent Delaware Superior Court decisions that favored policy holders, In Re Solera Insurance Coverage Appeals in 2020 and In Re Verizon Insurance Coverage Appeals in 2019.
Until Solera, seeking coverage for appraisal actions was contentious and added friction to the claims process. While not the outcome policy holders had been seeking, the Delaware Supreme court has now provided both insurers and policyholders a clear decision concluding there is no coverage for appraisal rights litigation under a public company D&O insurance policy.
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