(Article from Insurance Law Alert, May 2023)
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Holding
The Fourth Circuit ruled that a Virginia district court’s interpretation of a “bump up” exclusion in D&O policies was unreasonably narrow, vacating the decision and remanding the matter for further proceedings. Towers Watson & Co. v. Nat’l Union Fire Ins. Co., 2023 U.S. App. LEXIS 11338 (4th Cir. May 9, 2023).
Background
In 2015, Towers Watson and Willis Group Holdings executed a merger agreement that involved a “reverse triangular merger”—a transaction in which a newly created corporation and wholly owned subsidiary of Willis merged into Towers Watson and then disappeared, leaving Towers Watson as the surviving entity. Following the merger, Towers Watson shares were canceled and shareholders received the right to 2.649 shares of Willis stock for each cancelled share. The surviving Towers Watson entity then issued the remaining newly created shares to Willis, resulting in Towers Watson becoming a wholly owned subsidiary of Willis.
Thereafter, former Towers Watson shareholders filed class actions in Virginia District Court and in the Delaware Court of Chancery, alleging federal securities and state law claims based on an allegedly below-market valuation of Towers Watson shares. Both suits settled for a total of $90 million. The insurers funded Tower Watson’s defense but denied indemnity based on a “bump up” exclusion that barred coverage for judgments or settlements stemming from a claim 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.”
The district court concluded that ambiguity existed as to whether the merger constituted an “acquisition” under the exclusion. As discussed in our November 2021 Alert, the district court reasoned that an acquisition is commonly associated with “the takeover of one company by another, with both companies surviving the transaction, as opposed to a merger, which contemplates the combination of two companies into a single entity, with shared ownership by the shareholders of both participating entities.” Additionally, even though Virginia law governed the dispute, the district court noted that Delaware corporate law recognizes a merger as “distinct from other types of ‘acquisition techniques’ involving the transfer of stock or assets.” The Fourth Circuit vacated the decision.
Decision
The Fourth Circuit ruled that the district court erred in its interpretation of the term “acquisition.” It explained that the “ordinary and accepted meaning” of “acquisition” contemplates the gaining of possession or control over something. The court concluded that as a result of the reverse triangular merger, another entity gained possession or control of all, or substantially all, of the ownership interest in and assets of Towers Watson. Rejecting the district court’s interpretation, the Fourth Circuit stated that “nothing in the bump-up exclusion stipulates, or even hints, that the term ‘acquisition’ was intended to refer only to a particular form of acquisition . . . .”
Notably, the Fourth Circuit’s decision did not resolve the ultimate question of whether the bump up exclusion bars coverage. In its original motion, Towers Watson posited two other arguments to explain why the exclusion did not apply: (1) that Towers Watson was not “an entity”; and (2) that the underlying settlements did not represent an effective increase in consideration for the original Towers Watson shares. The Fourth Circuit remanded the matter for resolution of those issues.
Comments
In arguing against application of policy exclusions, insureds often seek to establish ambiguity in undefined terms and argue for narrow construction of such provisions. The Fourth Circuit’s decision illustrates the limitations of such arguments. While ambiguous exclusionary terms may be subject to strict construction, courts are not free to rewrite clear and unambiguous policy language. Similarly, the ruling is also a reminder that ambiguity results from two “equally possible” and reasonable interpretations given the context of the disputed provision, and is not established merely because a term may have multiple dictionary definitions.