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D&O Coverage Litigation for Securities

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D&O Coverage Litigation for Securities INSURANCE AND REINSURANCE March 2019 IN THIS ISSUE Delaware Securities Appraisal actions, involving tens of millions of dollars, are giving rise to litigation with novel D&O coverage issues. In this article, Bob Allen identifies the coverage issues and arguments that will be decided in the current round of high-stakes litigation. D&O Coverage Litigation for Securities Appraisal Actions ABOUT THE AUTHOR Bob Allen is a Dallas-based, 25 year member of the IADC and he is the past chair of the immediate predecessor of what is now the Insurance and Reinsurance Committee. He has handled complex insurance and reinsurance litigation all over Texas and other states as well over his 35 year legal career. He is a graduate of Denison University and SMU Dedman School of Law. He can be reached at [email protected]. ABOUT THE COMMITTEE The Insurance and Reinsurance Committee members, including U.S. and multinational attorneys, are lawyers who deal on a regular basis with issues of insurance availability, insurance coverage and related litigation at all levels of insurance above the primary level. The Committee offers presentations on these subjects at the Annual and Midyear Meetings. Learn more about the Committee at www.iadclaw.org. To contribute a newsletter article, contact: Bryan D. Bolton Vice Chair of Newsletters Funk & Bolton [email protected] The International Association of Defense Counsel serves a distinguished, invitation-only membership of corporate and insurance defense lawyers. The IADC dedicates itself to enhancing the development of skills, professionalism and camaraderie in the practice of law in order to serve and benefit the civil justice system, the legal profession, society and our members. w: www.iadclaw.org p: 312.368.1494 f: 312.368.1854 e: [email protected] - 2 - INSURANCE AND REINSURANCE COMMITTEE NEWSLETTER March 2019 In the context of a merger or acquisition, the Delaware §262 appraisal petitioners Delaware General Corporation Law §262 have reaped enormous profits from their (“Delaware §262”) provides an equitable Delaware §262 appraisal actions resulting remedy that allows shareholders of a from an increase in the stock share price, publicly held company being acquired to plus the statutory interest. In other dissent to the so-called “deal price” in the instances, the dissenting shareholders have merger and it appoints the Delaware made significant money on the statutory Chancery Court to appraise the value of their interest alone; even when the Chancery stock shares. Other states also have similar Court determines that the fair value of the securities appraisal statutes. See, e.g., stock is less than the merger price. Kansas Statutes Annotated 17-6712. Under Accordingly for certain investors and their Delaware §262, dissenting shareholders litigation counsel, Delaware §262 appraisal receive the appraised value of their stock, as actions can be a highly lucrative litigation determined by the Chancery Court, which opportunity. could be lower, higher or the same as the merger price. Additionally, Delaware §262 With this background, since 2016, at least appraisal petitioners can recover annual three acquired companies that litigated interest at 5% over the federal discount rate securities appraisal proceedings to eventual compounded quarterly from the date of the settlements have brought coverage actions merger until the appraisal action concludes.1 against their Directors and Officers (“D&O”) insurers to recover their costs of defending Obtaining a return of 5% annual interest the securities appraisal actions and in two of compounded quarterly over a very low the cases, the Delaware §262 statutory federal discount rate has attracted interest components of the settlements as enterprising and sophisticated investors to well.3 The issue of first impression raised in dissent to mergers and institute Delaware these cases is whether the settlement of and §262 appraisal actions.2 In some instances, the attorneys fees incurred in defending a 1 Bob Allen, until recently, was involved in one of the District of Texas, Dallas Division, which involved the Kansas Securities Appraisal Action D&O coverage actions noted in securities appraisal statute. CEC Entertainment only sought this casenote, in which he monitored the other actions. This its attorneys fees and expenses incurred in defending the casenote reports on the main arguments asserted in the Kansas appraisal actions and it did not seek D&O coverage securities appraisal action D&O coverage litigation, but it for an interest component of the appraisal action does not comment on the merits of those arguments. The settlement. CEC Entertainment v. Travelers settled while supporting legal authority is available online from the competing motions for summary judgment were pending. briefing in the profiled cases. Zale Delaware, Inc. v. Liberty Insurance Underwriters, Inc., 2 Some of these Delaware §262 appraisal action petitioners et. al., Cause No. DC-17-09200 is currently on file in the 14th are arbitrageurs who do not purchase their stock in the to- Judicial District Court of Dallas County, Texas (“Zale v. be-acquired company until after upcoming merger plans Liberty”); and Solera Holdings, Inc. v XL Specialty Ins. Co., are announced. Case No. N18C-315 AML, was recently filed in the Superior 3 The initial securities appraisal action D&O coverage Court of the State of Delaware. litigation was CEC Entertainment, Inc. v. Travelers Cas. & Sur. Co. of Am., Civil Action No. 3:16-cv-02493 at one time on file in the United States District Court for the Northern w: www.iadclaw.org p: 312.368.1494 f: 312.368.1854 e: [email protected] - 3 - INSURANCE AND REINSURANCE COMMITTEE NEWSLETTER March 2019 securities appraisal proceeding are covered approximately $181 million in merger under the acquired company’s D&O consideration for Delaware §262 appraisal insurance policies. These claims involve petitioners shares of Zale stock is $13.1 significant amounts of money. For example, million in Zale v. Liberty, Zale is seeking over $30 million in coverage. In Solera Holdings v. XL, Currently, Zale v. Liberty is in the middle of Solera Holdings is seeking over $50 million in discovery. Of great interest to D&O insurers, coverage. policyholders and the D&O coverage bar will be the parties’ dispositive motions, which In Zale v. Liberty, Zale Corporation (“Zale”) are currently due in mid-March 2019. filed suit against the insurers in its D&O Meanwhile, Solera Holdings v. XL has only coverage tower to obtain coverage for its recently been filed and it has not yet $34.2 million settlement and over $6 million progressed to any discovery or motion in attorneys fees and other costs incurred in practice.4 defending Delaware §262 appraisal actions emanating from the corporate merger of On the one hand, Zale is taking the position Zale into Signet Jewelers Ltd. (“Signet”) in that the Delaware §262 appraisal actions 2014. For the Zale-Signet merger, the filed against it invokes its D&O policies Delaware §262 annual interest rate was Securities Action Liability coverage insuring calculated at 5.75%. The settlement agreement because they involve claims for agreement did not allocate what portion of wrongful acts. On the other hand, the the settlement was attributable to an insurers counter that Delaware §262 increase in the price of petitioners shares of appraisal actions do not involve a wrongful Zale stock and what portion of the act; but even if they do, they are excluded settlement was attributable to Delaware from the definition of loss due to the §262 statutory interest. By reference, 5.75% operative policy’s “bump-up” exclusion.5 annual interest compounded quarterly for the 15 months between the date of the Zale- Signet merger and the settlement of the Delaware §262 appraisal actions on the 4 Solera Holdings v. XL is an example of a Delaware §262 5 The parties are also raising other claims and defenses, appraisal action resulting in a lower share price than the which are not addressed in this casenote. For example, Zale merger price. There, the merger share price was $55.85. is asserting that the Delaware §262 appraisal actions were Although Solera Holdings incurred $13.5 million defending interrelated wrongful acts to a covered shareholder the Delaware §262 appraisal action, the Delaware Chancery fiduciary claim (which Zale won on summary judgment) and Court found that the fair value of the merger share price it is seeking extracontractual damages. The insurers are also was actually $53.95, almost $2 a share less than the merger claiming that the Delaware §262 appraisal settlement price. After this finding by the Delaware Chancery Court, constitutes uninsurable restitution and by virtue of the the parties agreed that the Delaware §262 statutory timing of the merger, it is excluded by the run-off interest was valued at $38 million and then they settled the endorsement. Additionally, the insurers are raising Delaware §262 appraisal action. improper notice and lack of consent to settle. w: www.iadclaw.org p: 312.368.1494 f: 312.368.1854 e: [email protected] - 4 - INSURANCE AND REINSURANCE COMMITTEE NEWSLETTER March 2019 I. Do securities appraisal actions Travelers; however, argued that "[t]he only involve a wrongful act? conduct of CEC that has any relation to the appraisal action was the merger itself, which The issue of whether appraisal actions is neither wrongful nor improper and does involve a wrongful act will be front and not constitute a wrongful act.” The center in the upcoming summary judgment argument continues that the nature of the motion practice in Zale v. Liberty. acquired company’s conduct is irrelevant Meanwhile, this issue was the focus of two because securities appraisal statutes do not sets of dispositive motion briefing and two require bad conduct or unfairness and they lengthy court hearings presided over by do not consider whether any wrongdoing Northern District of Texas Chief Judge occurred.
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