A merger between two major international brokers led to two shareholder suits that were settled for an amount totaling $90 million. The attempt to recover the settlement amount from the insurer’s under the securities claim policy was excluded by the court by reason of the “bump-up” exclusion. It excluded from the definition of “Loss” “any amount of any … settlement representing the amount by which such price or consideration [for the merger] is effectively increased …”. A “Loss” was a loss arising from a securities claim made against the insured for any wrongful act indemnified by the insured.

The claims by shareholders alleged a violation of the merger proxy solicitation rules and the alleged breach of a fiduciary duty on the part of the insured’s chief executive officer in failing to disclose an alleged conflict of interest whilst negotiating the merger.

The underlying complaints alleged that the consideration received by the insured’s shareholders for the merger was inadequate. Because the allegations of inadequate consideration were the basis for the harms underlying the claims, the actions necessarily alleged inadequate consideration thus invoking the exclusion. The settlements entered into represented “the amount by which such price or consideration is effectively increased”. The amount paid by way of the settlement clearly related to the amount of consideration the shareholders received in connection with the merger. The settlements in effect represented consideration for the merger. The bump-up exclusion did not only apply to those amounts specifically identified as the consideration paid for a merger or its completion, as long as the amounts were amounts “representing” that which “effectively increased” the consideration. The focus was on the overall result, namely whether, at the end of the day, the former shareholders were paid additional money because the amount they received in the merger was inadequate. Giving the words in the exclusion their reasonable and ordinary meaning the settlement represented amounts that effectively increased the consideration. The amount of the consideration was $90 million despite the fact that this included attorneys’ fees, taxes and administrative costs. The shareholders sued for and received by way of common settlement funds, $90 million which was therefore the amount by which the consideration was effectively increased.

[Towers Watson & Co v National Union Fire Insurance Co of Pittsburgh, Pa case no 1:20-cv-00810 in the US District Court for the Eastern District of Virginia]