A Delaware court recently found for the policyholders in determining that a directors and officers (D&O) liability policy covered the settlement of an underlying action alleging violations of the Securities Exchange Act of 1934 (the Exchange Act). Indeed, in Harman International Industries, Inc. v. Illinois National Insurance Company, No. N22C-05-098 PRW CCLD, 2025 WL 84702 (Del. Super. Ct. Jan. 7, 2025), the court held the D&O policy’s “bump-up” exclusion was not a bar coverage. The policy’s bump-up exclusion, which insurers often cite as a coverage defense to underlying securities litigation stemming from the acquisition of an insured company, excluded from the definition of “loss” the amount of any settlement or judgment that represents an increase in the price paid to acquire an entity. Id. at *1.
There, following a series of transactions, the insured company, Harman, effectively was acquired by Samsung Electronics America, Inc., becoming a 100 percent-owned subsidiary of Samsung. Id. at *8. The underlying plaintiffs brought a class action suit alleging that Harman violated the Exchange Act by issuing a materially false and misleading definitive proxy statement to secure shareholder support for an undervalued acquisition. Id. at *2. Specifically, the underlying plaintiffs alleged that they were induced to vote their shares and accept inadequate consideration of $112 per share, when Harman was aware that its value was far greater than $112 per share. Id. The underlying plaintiffs sought damages and actual economic loss—i.e., the difference between the price Harman shareholders received and its true value at the time of the acquisition—in an amount to be determined at trial. Id. The parties to the underlying securities action entered into a stipulation of settlement for $28 million, which the federal district court approved. Id. at *3.
The insurers refused to indemnify Harman for the settlement and Harman commenced this coverage litigation. Id. Harman and the insurers cross-moved for summary judgment, with Harman arguing the settlement was covered under the D&O insurance and the insurers arguing the bump-up exclusion barred coverage. Id. at *3–*5. The court found that “[w]ithout a cognizable request to remedy inadequate deal price” as a viable remedy for at least one claim in the underlying securities action, the bump-up exclusion would not apply. Id. at *9. Thus, the insurers had the burden of establishing that the underlying plaintiffs had requested a remedy for an inadequate deal price for at least one of their claims, and that was a form of relief permitted for that asserted claim. Id.
The insurers did not meet their burden of proof. The underlying plaintiffs’ requested relief was the difference between the price they received and the price of the shares’ true value at the time of the acquisition. Id. Although the court found that “one might rightly read that as a request of relief for inadequate consideration[,]” that does not mean such request is “a right or viable remedy….” Id. There, a “cured inadequate deal price” was not the remedy for the plaintiffs’ specific causes of action as alleged. Id. at *10.
Furthermore, the court noted that for a settlement to represent an effective increase in consideration, the settlement must be for the actual purpose of “bumping up” the value of the deal. Id. The court noted that when determining a settlement’s purpose, the court cannot simply look at the relief sought in the underlying action; the court also should look “to the record evidence to discern the bases of the settlement”—e.g., the language of the settlement, indications that the settlement amount represents compensation for an inadequate deal price, stage of the litigation at the time of the settlement, and the composition of the settlement class. Id. In Harman, the court determined the record did not support the finding that any part of Harman’s settlement with the underlying plaintiffs represented an amount by which the transaction price or consideration effectively was increased. Id. at *11. The insurers did not overcome their burden of demonstrating that any portion of the settlement of the underlying securities class action fell under the bump-up exclusion. Id. at *12. As such, the settlement was covered under the D&O policy. Id.
In sum, the Harman decision is a win for policyholders engaged in securities litigation. There, the court appropriately found a limited application of the bump-up exclusion, such that it did not bar coverage for the underlying settlement with the class action plaintiffs. Furthermore, the court correctly assigned the burden of establishing application of a policy exclusion to the insurers.