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Court Rules That D&O Policy’s “Bump-Up” Exclusion Does Not Apply to Merger Transaction
Posted in D&O Policies

On August 10, 2023, Judge Rennie of the Superior Court of Delaware issued a decision in a pair of cases, Viacom Inc. v. Paramount Global, C.A. N22C-06-016 SKR CCLD and Redstone v. ACE American Insurance Co., C.A. No. N22C-06-020 SKR CCLD, ruling that a D&O policy’s “bump-up” exclusion did not apply to losses arising from a merger transaction.

The coverage dispute arose from a 2019 transaction through which Viacom merged with CBS.  As a result of the all-stock transaction, “all assets of Viacom ‘vest[ed] in CBS, and CBS was the surviving corporation.”  Shareholders brought several lawsuits challenging the merger that were consolidated in the Delaware Chancery Court.  The parties reached a settlement of the M&A litigation, and the proposed terms include the payment of additional consideration of $122.5 million.  Viacom’s D&O coverage is subject to a so-called “bump up” exclusion, precluding coverage for M&A settlements that increase the consideration that paid to shareholders of the acquired entity.  The original purpose of such exclusions was to avoid a collusive situation where an insured negotiates of a below-market price for an M&A deal, inviting inevitable shareholder objections, which are then settled using insurance proceeds to “bump up” the consideration. 

The “bump-up” provision in the applicable policy excluded from the definition of “loss” “any amount representing the amount by which the price of or consideration paid or proposed to be paid for the acquisition or completion of the acquisition of substantially all of the ownership interest in, or assets of, an entity . . . was inadequate or effectively increased.”  The insureds argued that this provision did not cover the transaction at issue here—an acquisition by merger where the acquired company does not survive the transaction.  The Court agreed, observing that other provisions of the policy distinguished between an acquisition of a Company or its assets, on the one hand, and, on the other, “the merger or consolidation of the Company into or with another entity such that the Company is not the surviving entity.”  The Court concluded that “the Merger may be ‘an acquisition of all or substantially all ownership interest in, or assets of an entity,’” within the meaning of the “bump-up” exclusion, “because all assets of Viacom ‘vest[ed] in’ CBS.”  Nevertheless, the absence of any express reference to a merger transaction in the exclusion raised a “reasonable inference that the Bump-Up Provision does not encompass the Merger.”  Accordingly, the provision was ambiguous, and the “ambiguity should be resolved in favor of” the insureds.

There are a few interesting takeaways here.

First, even though the “bump-up” exclusion appeared the policy’s defined terms section, the Court nevertheless treated the provision “as an exclusion based on its exclusionary effect.”  This was significant given that Delaware law mandates “a strict and narrow construction” of policy exclusions and requires that exclusions be “specific, clear, plain, conspicuous and not contrary to public policy.”  In a case discussed on this blog, The New York Court of Appeals recently emphasized that New York law similarly treats “limiting language in the definition of coverage” the same as a policy exclusion.

Second, this decision supports the position previously articulated on this blog that the interpretive canon contra proferentem (construing ambiguous contract language against the drafter) applies with full force even where the policyholder can be said to be “sophisticated” (as Viacom surely is).  Properly understood, the contra proferentem doctrine focuses on who was responsible for drafting the contract, not the relative sophistication of the parties as such.  The Restatement of the Law of Liability has appropriated rejected any per se exception to the rule based solely on the sophistication of the policyholder.

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