In a significant ruling for policyholders on an issue of first impression, on July 31, 2019, the Delaware Superior Court determined that shareholder appraisal actions constitute a covered "Securities Claim," as that term is commonly defined in many directors and officers ("D&O") insurance policies. Solera Holdings, Inc. v. Xl Specialty Ins. Co., C.A. No. N18C-08-315 AML CCLD, 2019 WL 3453232 (Del. Super. Ct. Jul. 31, 2019) ("Solera").
Section 262 of the Delaware General Corporation Law ("DGCL") entitles shareholders who dispute the adequacy of a merger's share price to "an appraisal by the Court of Chancery of the fair value of the stockholder's shares of stock." In Solera, an acquired target company pursued insurance coverage litigation against its D&O insurers to recover its defense costs incurred, and pre-judgment interest awarded against it, in a DGCL § 262 appraisal action.
Denying coverage, the D&O insurers argued, among other things, that DGCL § 262 appraisal actions do not constitute a "Securities Claim" under their policies' "Side C" entity coverage. Specifically, the D&O insurers maintained that a "violation" of law, as required by their policies' definition of "Securities Claim" (i.e., "any actual or alleged violation of any federal, state or local statute, regulation, or rule or common law regulating securities"), must involve wrongdoing, which the petitioner in an appraisal action is not required to prove.
Rejecting the D&O insurers' position as unsupported by the unambiguous "plain language" of their policies, the court determined that, under its "plain and ordinary meaning," the undefined term "violation" simply means the "contravention of a right or duty" or a "breach of the law." The court further noted that, had the D&O insurers "intended to limit coverage to claims alleging wrongdoing," they "could have used [such] limiting language," but did not.
Applying this construction, the court concluded that a DGCL § 262 appraisal action is a covered "Securities Claim," because an "appraisal petition necessarily alleges a violation of law or rule" regulating securities. In particular, the court determined that an appraisal demand is, "[b]y its very nature," an allegation that the company contravened the right of shareholders under Delaware law to receive "fair value" for their shares when they are cashed out of their positions in connection with mergers or consolidations.
Likewise, the court also debunked the argument commonly advanced by insurers that insurance coverage for pre-judgment interest is limited to covered judgments, finding that position "untethered to the language" of the D&O policies at issue, which imposed no such limitation.
- Your D&O insurance program may respond with coverage for the defense and indemnification of shareholder appraisal proceedings.
- Corporations involved in merger or consolidation transactions should therefore promptly notify their D&O insurers upon receipt of any shareholder appraisal demands.
- Commercial policyholders should remain mindful that an insurance policy's coverage granting language is to be construed broadly in favor of coverage and resist insurer attempts to read unexpressed restrictions into their policies.
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