The Delaware Supreme Court has had its say on whether Directors and Officers insurance policies that covered claims for “actual or alleged” violation “of any federal, state or local statute, regulation or rule or common law regulating securities” covered appraisal actions – which, at least by statute, do not require any evidence of wrongdoing. The Court’s answer was clear, and the opinion unanimous: appraisal actions are not covered by D&O policies with this language. The Court reasoned: “Because appraisal actions involve no adjudication of wrongdoing, they do not involve ‘violations’ of any law or rule, and thus, they do not fall within the definition of a ‘securities claim[.]”
While there are likely to be a number of insurance practitioners covering this decision from the insurance side (see here as an example), we also note there are appraisal law takeaways of relevance:
- Reaffirmed: Appraisal does not require proof of wrongdoing. This decision reaffirms the doctrine that appraisal actions do not require proof of wrongdoing. There need not be a violation of law for an appraisal action; rather, appraisal is, in theory, a ‘fact finding’ exercise where the Court sets the fair value of the relevant securities. Appraisal is a “neutral proceeding” – even though there are parties on both sides and it looks much like an adverse litigation.
- Appraisal cases can be expensive! This case is a window into the costs for a defendant in an appraisal case: here, Solera alleged over $13 million in defense costs.*
- Valuation Date matters. (We’ve mentioned this before.) The Court observed that: “the valuation date under Section 262 is as of the date of the execution of the merger, not the date the merger agreement is executed” and viewed this as suggestive that “an appraisal action is not designed to address alleged wrongdoing relating to the merger process[.]” The Court further wrote: “Rather, any such alleged wrongdoing is frequently addressed, as it was here, in a separate stockholder fiduciary litigation brought by stockholders against the target board’s directors.”
- Future Litigation: What about Intertwined Cases? The Court did not adopt or address the policyholder’s arguments that appraisal doesn’t occur in a “vacuum”. Here, the policyholder argued that the underlying case involved allegations of a rigged sales process. The fact the Court did not engage on this point leaves open a significant area for future litigation. Appraisal cases are often in the company of Section 220 inspection rights demands, breach of fiduciary duty cases, disclosure violation cases, and even securities fraud allegations. Indeed, the Court acknowledged as much in the quotation above. Future insurance litigation may well focus on the nexus between such cases: can an insurer not cover an appraisal action if that action is intertwined, as an example, with a fiduciary duty action? Or what if the appraisal action directly led to the additional case, something we’ve covered before?
- Future Litigation: Questions Left Open. The Supreme Court’s ruling left some questions open as well, including about interest and the consent to counsel.
- Policy language matters. This decision, and a prior insurance decision, concern specific policy language. Policyholders with different language may be in a different position. So we cannot posit a rule that no D&O insurance covers appraisal, but policies with this common language, and Delaware choice of law, do not. D&O Diary provides a more extension explanation of the relevant policy language and why that matters here.
See the opinion here [.pdf]
See further coverage.
*Attorneys from RKS, though not the author, represented petitioners in the Solera appraisal action that brought about this dispute.