The United States Court of Appeals for the Fourth Circuit, applying Virginia law, has affirmed a district court's ruling that a "bump-up" provision in a D&O policy applied to bar indemnity coverage for the settlement of various underlying shareholder actions involving allegations of undisclosed conflicts of interest in connection with a merger. Towers Watson & Co. v. Nat'l Union Fire Ins. Co. of Pittsburgh, Pa., No. 24-1302, 2025 WL 1509393 (4th Cir. May 28, 2025).
In 2015, the insured entered into a merger agreement. As part of the merger, the insured's shareholders received the right to 2.649 shares of the acquiring company's stock for each share of the insured's stock, along with a special dividend. The insured's former shareholders filed separate class actions against the insured, alleging that the insured's CEO negotiated the merger agreement under an undisclosed conflict of interest and thus agreed to a below-market valuation of the insured's shares to ensure the finalization of the transaction. The shareholder litigation ultimately settled for a total of $90 million.
The insured sought coverage for the shareholder litigation and the resulting settlement under its D&O liability policy. This policy included a "bump-up" exclusion, which provided that "[i]n 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." Although the insurers provided the insured with a defense in the shareholder actions, they denied indemnity coverage for the subsequent settlements based upon the policy's bump-up exclusion.
The insured sued its insurers, seeking a declaration that the bump-up exclusion did not foreclose indemnity coverage because the merger did not involve an "acquisition" within the meaning of the exclusion. The district court initially agreed with the insured, but the Fourth Circuit vacated and remanded on the grounds that the merger did involve an acquisition within the meaning of the exclusion. On remand, the district court considered the insured's alternative argument that the bump-up exclusion was facially inapplicable because the settlements did not "represent an effective increase in consideration for the original shares" of the insured's stock. The district court rejected this argument, granting summary judgment to the insurers and ruling that the insurers had no indemnity obligations in connection with the settlement—including the portion of the settlement for the shareholders' attorneys' fees. The insured appealed.
On appeal, the Fourth Circuit affirmed the district court's holding. The appellate court read the provision as having two prerequisites to its application: first, there must be a claim alleging that the consideration paid for an acquisition was inadequate; and second, the settlement of such claim must "represent" an "effective increase" in the "price or consideration" shareholders received for that acquisition. The court concluded that there was no real dispute that the shareholders filed a claim alleging that the consideration paid for the acquisition of the insured was inadequate, and thus that the first condition was satisfied. Turning to the second condition, the court examined the plain meaning and dictionary definitions of the terms "represent" and "effectively increase." The court concluded that, when read together, these terms required looking at whether the "real result" of the settlements—rather than the theoretical result—was that the shareholders received additional consideration for their shares. The court determined that was the case because the shareholders, in claiming that their shares were devalued in the merger process because of the undisclosed conflict of interest, effectively sought an increase (i.e., a "bump-up") in the consideration paid for their shares. As such, the court ruled that the bump-up exclusion applied and the insured was not entitled to indemnification for the settlements.
The court rejected the insured's additional arguments to the contrary. First, the insured maintained that the district court had collapsed the two distinct elements of the bump-up exclusion into one by only looking at the allegations and not what the settlement itself represented. The Fourth Circuit pointed to the district court's analysis of the provision, which included separate sections for each element, and its own independent analysis. Second, the insured contended that settlements of alleged violations of Section 14(a) of the Securities Exchange Act are categorically immune from the application of bump-up provisions. The court explained that this argument was irrelevant, as it was not presently tasked with deciding whether or not the underlying litigation came within Section 14(a). Finally, the insured argued that the measure of damages was based on an assumption that no deal would have occurred, such that the damages represented only the devaluation of the shareholders' stock and not an increase in their compensation for the deal. The court stressed that the shareholders' own experts opined that their damages were based upon the difference between what adequate consideration for their shares would have been and the consideration that they actually received. The court observed that the insured's position ignored the shareholders' allegations, the purpose of the expert report, and the practical effect of the damages to compensate shareholders for the purportedly inadequate consideration they received for the acquisition of their shares.
The court also affirmed the district court's ruling that the coverage for the underlying plaintiffs' attorneys' fees was also barred. The insured argued that, at minimum, the portion of the settlement for attorneys' fees should be covered because those amounts do not "represent" an "effective increase in consideration." The court rejected this argument, noting that the settlement was awarded as a common fund. The court explained that the settlements required the insured to pay the entire amount of the settlement into one fund, and that the shareholders' attorneys then petitioned the court for fee awards to come out of that fund. The court highlighted that the shareholders were entitled to the full amount of the fund, which represented an effective increase in the consideration paid for the merger and notedthat the fact that the shareholders placed enough value on their attorneys' contributions to transfer to them a portion of that sum had no bearing on whether the exclusion applied to the fund in the first instance.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
