An appeal court judgment from Virginia, USA upheld the lower court’s finding that the bump-up exclusion in a D&O policy excluded insurers’ liability to indemnify a merging party against a USD90 million federal securities law claims by shareholders. The claimants alleged that the amount received for the shares in the merger were too low because of a conflict of interest of the party who negotiated the deal. Our previous blog on the lower court judgment will be found here.
The merging party who was sued had a D&O liability policy and six layers of excess coverage for losses arising from a “wrongful act” of the organisation or of an insured director or officer for damages, settlements, judgments, and defence costs.
The bump-up exclusion bars coverage for losses stemming from judgments or settlements reached in connection with a claim that seeks an increase – or “bump up” – in the consideration paid for shares. According to the exclusion, the loss arising from a loss would not include “any amount of any judgment or settlement representing the amount by which such price or consideration is effectively increased.” Two conditions must be satisfied. First, there must be a claim alleging that the consideration paid for the acquisition was inadequate. And second, the settlement of such claim must “represent” an “effective increase” in the “price or consideration” shareholders received for that acquisition. Seeing the words “represent” and “effective” were not defined in the policy, the court looked at dictionary definitions. The terms “represent” and “effective increase,” particularly when read together, indicate that we must look at the real result of the situation and not the theoretical one. The real result of the settlement of the shareholder claims was that the shareholders received an additional consideration for their relinquished shares. The second condition was therefore satisfied, and the claim was excluded by the bump-up exclusion.
The decision of the lower court dealt with in our previous blog was upheld.
The same result would follow on the same wording and facts in a South African court.