Delaware Supreme Court Holds that Appraisal Proceeding is not a “Securities Claim”

Reversing the trial court, the Delaware Supreme Court has held that an appraisal proceeding does not constitute a “Securities Claim” under a D&O policy.  In re Solera Insurance Coverage Appeals, Nos. 413,2019 and 418,2019 (Del. Oct. 23, 2020).

A publicly-traded company was acquired by a private equity company.  Several shareholders of the publicly-traded company who objected to the merger sought appraisal in the Delaware Court of Chancery under 8 Del. C. § 262, seeking a determination of the fair value of their shares.  The Court of Chancery ultimately concluded that the fair value of the company’s shares was less than the merger price, and ordered the company to pay that amount in addition to statutory pre-judgment interest.  The company sought coverage for the pre-judgment interest and costs defending against the appraisal action from its D&O carriers, which denied coverage on the ground that the matter did not constitute a “Securities Claim” as defined in the primary policy.

In the ensuing coverage litigation, the trial court initially ruled that the appraisal action did constitute a Securities Claim, which was defined to include, subject to other specified requirements, a “violation” of any “federal, state, or local statute, regulation, rule, or common law regulating securities.”  The trial court reasoned that a “violation” of a law may occur without an allegation of wrongdoing on the part of the insured, and that by its “very nature,” an appraisal proceeding includes an allegation that a company contravened a right of a shareholder to receive fair value for their shares.

The Delaware Supreme Court reversed.  It held that the plain meaning of the term “violation” suggested an element of wrongdoing.  The opinion analyzed the history of appraisal proceedings under Delaware law and concluded that appraisal proceedings have a “neutral” purpose—to determine the value of the company—and that an “unbroken line of cases” in Delaware bolstered this conclusion.  The court also noted that this neutral purpose was evinced in part by the fact that appraisal petitioners can receive less than they were entitled to receive upon consummation of the merger, as was the case in the underlying proceeding at issue here.