(Article from Insurance Law Alert, June 2025)
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Holding
The Fourth Circuit ruled that a bump-up exclusion in a D&O policy unambiguously applied to settlement of shareholder suits brought against the insured entity. Towers Watson & Co. v. National Union Fire Ins. Co. of Pittsburgh, PA, 138 F. 4th 786 (4th Cir. May. 28, 2025).
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, 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 canceled 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 and Delaware, alleging federal securities and state law claims in which plaintiffs alleged that the Towers Watson shares received below-market valuation of Towers Watson shares due to alleged conflicted interest on Towers Watson’s board. Both suits settled for a total of $90 million. The D&O insurers funded Towers 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.”
A Virginia district court found ambiguity as to whether the merger constituted an “acquisition” under the exclusion. See November 2021 Alert. The Fourth Circuit vacated the ruling on the narrow ground that the reverse triangular merger constituted an “acquisition” within the meaning of the exclusion. See May 2023 Alert. The Fourth Circuit did not resolve the ultimate question of whether the bump-up exclusion barred coverage for the underlying settlements, remanding the matter for resolution of that issue. On remand, the district court ruled that the exclusion applied to the entire underlying settlement, including more than $17 million in plaintiffs’ attorneys’ fees paid from a common fund. The Fourth Circuit affirmed.
Decision
The Fourth Circuit agreed with the district court that the “real result” of the underlying settlement was that the shareholders received additional consideration for their relinquished shares. The court explained: “The shareholders, claiming their shares were devalued in the merger process because of [a] conflict of interest, sued Towers Watson. Their lawsuit sought to rectify that perceived shortfall. That is, they sought what was effectively an increase (or ‘bump-up’) in the consideration paid for their shares.”
The court rejected Towers Watson’s assertion that the exclusion did not apply because the underlying suits alleged violations of Section 14(a) of the Securities Exchange Act, which governs inadequate disclosures, not inadequate consideration. The court explained that the question of whether Section 14(a) violations were alleged or established was irrelevant given that the parties had already settled the suit. Rather, the central issue was that the $90 million settlement effectively increased the per-share compensation paid to Plaintiffs and thus fell within the scope of the bump-up exclusion.
Finally, the Fourth Circuit affirmed the district court’s ruling that coverage for the settlement portion designated as attorneys’ fees was also barred by the bump-up exclusion. Under the common fund doctrine, a court may award a reasonable attorney’s fee to “a litigant or lawyer who recovers a common fund for the benefit of persons other than himself or his client . . . from the fund as a whole.” The court reasoned that the full $90 million settlement represented “in toto an increase in consideration paid for the merger,” particularly given the structure of the settlement in which attorneys’ fees were to be paid out of the common fund, rather than directly by Towers Watson.
Comments
The Fourth Circuit’s decision aligns with the emerging majority view, at least outside of Delaware, that bump-up exclusions preclude coverage in shareholder suits challenging the transaction price in a merger or acquisition. See Komatsu Mining Corp. v. Colum. Cas. Co., 58 F.4th 305, 306 (7th Cir. 2023); Onyx Pharms., Inc. v. Old Republic Insurance Co. et al., CIV 538248 (Cal. Super. Ct. Dec. 30, 2022). Like the latest Fourth Circuit holding, these decisions have broadly construed different shareholder claims, including for disclosure violations, as effectively as seeking an increase in per-share valuation.
As discussed in our January 2025 Alert, a Delaware state court ruled that a bump-up exclusion did not bar coverage for an underlying settlement because, among other things, the underlying action alleged violations of Sections 14(a) and 20 of the Securities Exchange Act, which do not provide for consideration of an inadequate deal price as a remedy. Harman International Industries, Inc. v. Illinois National Insurance Co., 2025 Del. Super. LEXIS 3 (Del. Superior Ct. Jan. 3, 2025); see also Viacom Inc. v. U.S. Specialty Ins. Co., 2023 Del. Super. LEXIS 728, at *1 (Super. Ct. Aug. 10, 2023).