District Court Rejects

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A recent policyholder favorable ruling from the Eastern District
of Virginia adopted a narrow, strict construction of a
“bump-up” exclusion in a directors’ and officers’
liability policy. Following a “reverse triangular
merger,” the policyholder faced multiple shareholder lawsuits,
which eventually settled for $90 million. The insurers refused to
pay, invoking what is referred to as a “bump-up”
exclusion of the effective increase in price or consideration paid
or proposed to be paid for “the acquisition of all or
substantially all the ownership interest in or assets of an
entity.” The court held the exclusion ambiguous and disposed
of the insurers’ multiple arguments related to the meaning of
the exclusion’s terms pursuant to dictionary definitions and
Delaware corporate law; the fact that the merger transaction
included a brief step in which one entity temporarily became a
subsidiary of the other before the completion of the merger; and
the tax and accounting treatment of the temporary
“parent” entity as the “acquiring company” of
the other. The court’s definitive rejection of these and other
arguments not only provides crucial interpretive guidance for this
type of exclusion but also demonstrates the robust application of
interpretive principles useful to policyholders in a broader array
of coverage disputes.

The United States District Court for the Eastern District of
Virginia recently granted partial summary judgment in favor of a
policyholder under a directors’ and officers’ (D&O)
management liability insurance policy, holding that settlements of
underlying securities litigation were not unambiguously excluded by
a “bump-up” exclusion. Following a proposed or completed
acquisition of a public company, the target company’s
shareholders frequently bring legal challenges regarding the amount
of consideration paid or proposed to be paid supporting the
acquisition. Bump-up exclusions, sometimes referred to as
“inadequate consideration” exclusions, are a common
fixture in D&O liability insurance policies. Although they are
typically located within the policy definition of “Loss”
rather than as standalone exclusions, courts (including the court
in this case) have recognized that they operate as an exclusion and
have treated them as such. Insurers write this type of exclusion
into policies to discourage acquiring an entity at a discount and
then relying on the insurer to pick up the difference. Given the
prevalence of these exclusions, Towers Watson & Co. n/k/a
WTW Delaware Holdings LLC v. National Union Fire Insurance Co. of
Pittsburgh, P.A.
, No. 1:20-cv-810 (AJT/JFA), 2021 WL 4555188
(E.D. Va. Oct. 5, 2021), is of interest to any policyholders,
particularly those involved with a merger or acquisition.

Towers Watson & Co. n/k/a WTW Delaware Holdings LLC (Towers
Watson) executed a “reverse triangular merger” with
Willis Group Holdings plc (Willis), of Willis Tower (formerly known
as the Sears Tower in Chicago) fame. One stage of the multi-phase
merger involved a qualified stock purchase by which, in exchange
for 100% of the outstanding shares of Towers Watson’s common
stock, Willis temporarily became the “parent” of Towers
Watson and Towers Watson became a wholly-owned subsidiary of
Willis. Willis only arguably held the outstanding shares of Towers
Watson’s common stock when Towers Watson issued new shares,
never held by any of its shareholders, before being merged into a
Willis subsidiary. Ultimately, pursuant to the merger, both Towers
Watson and Willis cancelled and delisted all of their outstanding
publicly traded shares and Towers Watson shareholders received
certificates entitling them to newly-issued Willis shares. Willis
never acquired any of those formerlyowned Towers Watson shares. By
the end of the transaction, Towers Watson shareholders owned 49.9%
of the newly constituted Willis, and Towers Watson no longer
existed. Further, Towers Watson shareholders controlled half of the
board seats and the former CEO of Towers Watson became the new CEO
of the merged company.

Towers Watson, its post-merger CEO, Willis, and certain related
entities and former directors and officers subsequently faced a
putative class action proxy solicitation lawsuit and consolidated
shareholders’ derivative lawsuits related to the merger. Towers
Watson looked to its $80 million tower of D&O liability
insurance procured from National Union Fire Insurance Company of
Pittsburgh, Pa. (AIG) and six excess insurers.

The insurers agreed that the claims alleged in the underlying
actions constituted “Claims” for “Wrongful
Acts,” and any “Loss” arising out of the
“Wrongful Acts” was therefore potentially within the
scope of coverage of the AIG policy, to which the excess policies
followed form. AIG accepted defense of the underlying actions.
However, the insurers prospectively refused to indemnify Towers
Watson for any settlements or judgments in the underlying actions,
invoking the AIG policy’s bump-up exclusion:

In the event of a Claim alleging that the price or consideration
paid or proposed to be paid for the acquisition or completion of
the acquisition of all or substantially all the ownership interest
in or assets of an entity is inadequate, Loss with respect to such
Claim shall not include any amount of any judgment or settlement
representing the amount by which such price or consideration is
effectively increased; provided, however, that this paragraph shall
not apply to Defense Costs or to any Non-Indemnifiable Loss in
connection therewith.

Towers Watson sued its insurers and filed a motion for partial
summary judgment, seeking a declaration that the bump-up exclusion
would not operate to exclude any settlement or judgment from
coverage. Before the court ruled on the motion, the underlying
actions settled for a combined total of $90 million. The
settlements were approved and the underlying actions dismissed.

Applying Virginia law, the court recited standard presumptions
and principles of insurance law: deference to the language in the
policy, respect for the ordinary and customary meaning of words,
consideration of the policy as a whole to shed light on specific
terms or provisions. The court also stated it would apply the rule
of contra proferentem in the event of an ambiguity,
favoring interpretations that expand rather than narrow coverage.
Against that backdrop, the court framed the issue as whether the
bump-up exclusion unambiguously excluded the settlements in the
underlying actions from the definition of a covered
“Loss,” or whether a reasonable construction made the
bumpup exclusion inapplicable to the settlements.

Towers Watson argued that the transaction was a “merger of
equals” and therefore not an “acquisition” as
referenced in the exclusion. The AIG policy did not define the term
acquisition, and the insurers proffered dictionary definitions as
support for application to the merger. However, the dictionary
definitions did not shed light on the exclusion’s specification
of an “acquisition…of all or substantially all the ownership
interest in or assets of an entity.” Under Delaware corporate
law,1 that type of acquisition traditionally referred to
the takeover of one company by another rather than the joining of
two companies into a single entity. Further, the policy contained a
definition of “Transaction” that explicitly included
mergers and additional types of transactions other than the
“acquisition…of all or substantially all the ownership
interest in or assets of an entity.” Because the exclusion did
not include all of the transaction types included within the
definition of “Transaction,” under the principle of
expression unius est exclusion alterius, the other
transaction types—including a merger—should not be read
into the exclusion. Although the court recognized reasonable
arguments for interpreting the term “acquisition” in the
exclusion as including the reverse triangular merger at issue here,
the insurers could only prevail if that was the only reasonable
reading of the term. Because a reasonable, narrow reading existed,
the court held the merger was not unambiguously an
“acquisition” as that term was used in the exclusion.

Having rejected the application of the exclusion, the court did
not decide other issues raised by Towers Watson, including whether:
(i) the underlying actions were “Claim[s] alleging that the
price or consideration paid for [the] acquisition…is
inadequate;” (ii) the term “entity,” which was also
not defined in the policy, included Towers Watson; and (iii) the
settlements were an “amount…representing the amount by which
such price or consideration is effectively increased.”

Towers Watson is a welcome addition because it provides
support to policyholders faced with a coverage denial based on a
bump-up exclusion. Policyholders should carefully consider the
following arguments advanced by the insurers and the reasons the
court rejected each of them, as these arguments are likely to arise
again in future litigation:

  • The dictionary definitions and corresponding argument
    that the plain meaning of the term “acquisition” is
    “the act of acquiring something” and “acquire,”
    in turn, is “to come in possession and control, often by
    unspecified means.”
    The insurers argued this applied
    to the brief point of time in which Willis acquired the outstanding
    shares of Towers Watson stock that had never been owned by any
    Towers Watson shareholder. The court rejected this argument because
    it viewed the merger according to its overall scheme and final
    result, rather than focusing on a mere snapshot in time during the
    multi-phase transaction. Similarly, the court also rejected the
    insurers’ argument that definitions found elsewhere in the
    policy (namely, the term “Transaction”) did not foreclose
    the bump-up exclusion from applying to an acquisition structured as
    a merger. The court stated, “the issue is not whether, in some
    sense, a merger can be structured and viewed as a type of
    acquisition, but whether ‘the acquisition’ specifically
    described in the bump-up exclusion necessarily references the
    Merger.” Policyholders facing similar claims would do well to
    advocate for a practical approach to complicated, multi-phase
    transactions, and to search for language elsewhere in both the
    provision and the rest of the policy that support a favorable
    construction. In addition, policyholders may consider the argument
    that in order for an insurer to prevail, it must establish that its
    interpretation of a policy provision, particularly an exclusion, is
    the only reasonable interpretation.

  • The merger included at one point in time a step wherein
    Willis became the parent company of Towers Watson and Willis
    received all of the outstanding shares of Towers Watson’s
    outstanding stock.
    Again, the court took a practical view
    of the overall scheme and final result of the merger. This further
    underscores the wisdom in future policyholder litigants carefully
    considering how they frame a complicated, multi-step corporate
    transaction to maximize benefits under the relevant policies.

  • Delaware corporate law treatises describe
    “triangular mergers” as an acquisition technique and the
    description of a “merger of equals” has no legal
    The court deferred to the expertise of the
    Delaware Superior Court in Northrop Grumman Innovation Systems,
    Inc. v. Zurich American Insurance Co.
    , No. CV N18C-09-210,
    2021 WL 347015 (Del. Super. Ct. Feb. 2, 2021), which held the
    identical bump-up exclusion inapplicable to similar underlying
    securities litigation arising from a reverse triangular merger.
    2 Northrop Grumman is another useful opinion
    for policyholders facing bump-up exclusions, and the Towers
    court’s endorsement of the Delaware Superior Court
    opinion may give it additional weight as persuasive authority
    throughout the country.

  • Willis had been designated the “acquiring
    company” and the merger was characterized as a “qualified
    stock purchase” for accounting and tax purposes.

    Here, the court pointed to the specific type of
    “acquisition” created by the bump-up exclusion’s
    language and found that the tax and accounting treatment did not
    resolve the ambiguities in the language. This also ties into the
    utility of the argument that an insurer can only prevail where it
    establishes its interpretation of a policy provision is the only
    reasonable one.

More generally, the Towers Watson court appropriately
and decisively applied the broad interpretive principles helpful to
policyholders engaged in coverage litigation on a number of issues,
not just bumpup exclusions. The case should be considered
“required reading” for companies seeking D&O
insurance coverage for claims stemming from mergers or
acquisitions, but many of the takeaways listed above have broader
application beyond the realm of bump-up exclusions.


1 As noted by the court, the merger became effective upon
the filing of the Certificate of Merger with a Delaware state

2 The Northrop Grumman analysis was rejected by the
United States District Court for the Eastern District of Wisconsin
in another recent bump-up exclusion case, Joy Global Inc. v.
Columbia Casualty Co., No. 2:18-CV-02034, 2021 WL 3667077 (E.D.
Wis. Aug. 18, 2021) (applying Wisconsin law). Joy Global contained
different bump-up exclusion language, specifying that
“Loss” did not include “any amount of any judgment
or settlement of any Inadequate Consideration Claim other than
Defense Costs and other than [loss incurred by directors and
officers that is not indemnified by Joy Global]” and defining
“Inadequate Consideration Claim” as, “that part of
any Claim alleging that the price or consideration paid or proposed
to be paid for the acquisition or completion of the acquisition of
all or substantially all of the ownership interest in or assets of
an entity is inadequate.” Also, the court described the
transaction at issue as an “acquisition of all the ownership
interest of an entity.” Joy Global is on appeal to the United
States Court of Appeals for the Seventh Circuit.

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District Court Rejects