Texas Court Holds “Instrumental Act” in Appraisal Litigation is Execution of Merger

A Texas court of appeals found no coverage under two excess directors and officers liability policies for an appraisal action brought by dissenting shareholders to a merger pursuant to Section 262 of the Delaware General Corporation Law.  Zale Corp. v. Berkley Ins. Co., 2020 WL 4361942 (Tex. Ct. App. July 30, 2020).  The court held that the litigation right created by the appraisal statute turns on the act of executing the merger and not on any “wrongful act” preceding the merger.  Thus, because the merger was consummated after the policy period, there was no “wrongful act” during the policy period sufficient to trigger coverage for the appraisal suits.

The insured, a jewelry retailer, merged with another company.  As a result of the merger, the insured’s D&O policies were amended to extend the policy period, but only for claims arising out of wrongful acts fully occurring before the date of the merger.  On the date of the merger, dissenting shareholders brought three appraisal actions seeking fair value of their shares.  The insured settled the claims without notice to the insurers or their consent and tendered the settlement for coverage, which the insurers denied.

In coverage litigation, the insured argued that the appraisal action was a result of wrongful acts that allegedly occurred years prior to the merger, which were at issue in a separate shareholder suit.  The court disagreed, noting that an appraisal action has one “litigable issue,” which is the determination of the fair value of a petitioner’s shares on the date of the merger.  The court held that the appraisal action statute does not require a “wrongful act.”  Rather, the “instrumental act” that confers appraisal litigation rights is the execution of the merger.  Because the “triggering merger execution” occurred after coverage ended under the policies, no coverage existed for the appraisal actions.