Navigating the Bump-Up Exclusion: Recent Cases Highlighting Insurance Challenges in Public Company M&A Deals
Insurance carriers are increasingly using the “bump-up” exclusion in directors and officers (D&O) insurance policies to deny coverage for settlements in M&A litigation that result in shareholders receiving more value for the sale of a company. Recent cases have highlighted the importance of public companies reviewing their D&O policies to ensure sufficient coverage in the event of post-close merger litigation.
In a recent case involving Towers Watson, the US District Court for the Eastern District of Virginia applied Virginia law to determine that the bump-up exclusion applied to the settlement of a post-close lawsuit. The court emphasized the need to focus on the plain meaning of the exclusion and concluded that the settlement effectively increased the consideration for the merger, thus falling under the exclusion.
Conversely, in the Northrop Grumman case before the Delaware Superior Court, the court determined that the bump-up exclusion did not apply to the settlement of a post-close lawsuit because the underlying transaction did not qualify as an “acquisition” under the terms of the exclusion. The court interpreted the provision narrowly and strictly, limiting it to transactions that can only be called acquisitions.
Similar cases involving Joy Global and Viacom also highlighted the ambiguity of the bump-up exclusion and the importance of interpreting it in favor of the insured under Delaware law. These cases underscore the need for insurance counsel to carefully review D&O policies to ensure clients have sufficient coverage in the event of post-close merger litigation.
As insurance carriers continue to rely on bump-up exclusions and draft them more broadly, M&A practitioners and public companies must be vigilant in reviewing their policies to understand the limitations on coverage for breach of fiduciary duty claims arising from M&A transactions. The evolving case law surrounding bump-up exclusions emphasizes the need for proactive risk management in the realm of public company insurance policies.