Settlement of Merger Objection Litigation is Not Covered “Loss”

In a win for Wiley’s client, a California trial court has determined that a pharmaceutical company’s D&O policies did not cover its settlement of shareholder litigation alleging that the price another company paid to acquire the policyholder was inadequate. Onyx Pharmas. Inc. v. Old Republic Ins. Co., No. CIV 538248 (Cal. Super. Ct. Dec. 30, 2022).

The insured pharmaceutical company obtained a D&O policy providing that, with respect to “a Claim alleging that the price or consideration paid or proposed to be paid for the acquisition or completion of the acquisition of all or substantially all of the ownership interest in or assets of an entity is inadequate,” covered “Loss” shall not include “any amount of any judgment or settlement representing the amount by which such price or consideration is effectively increased.”

Another company acquired the policyholder in an all-cash takeover transaction in which it purchased the outstanding shares of the pharmaceutical company for $125 per share. After the acquisition, the pharmaceutical company’s shareholders sued its directors, alleging that they breached their fiduciary duties by “failing to take efforts to maximize the tender offer price for Onyx shareholders.” The pharmaceutical company settled the shareholder claims for $26 million and sought coverage under the D&O policy and several excess policies.

Following a bench trial, the court determined that the above provision, which it called the “Loss Exclusion,” unambiguously bars coverage for the settlement. Rejecting the policyholder’s argument, the court concluded that the Loss Exclusion applies regardless of whether the insured is the acquiror or the acquiree in the challenged transaction. The court also rejected the policyholder’s argument that the shareholders’ allegations concerning misrepresentations by board members brought the settlement outside the ambit of the Loss Exclusion. The court reasoned that this theory was “inextricably tied” to the claim for breach of the duty to maximize the tender offer price to the shareholders and that the damages, if any, are identical.

Giving the terms of the Loss Exclusion their plain meaning, the court found that the underlying shareholder litigation alleged that the price paid to acquire the policyholder was inadequate and was not covered under the D&O policies. The court noted that “[i]t is reasonable that the insurance carriers did not want to have insurance proceeds be a means of funding the purchase of assets by a corporation – which, as a pragmatic matter, would be the result if insurance funds were paid to [the policyholder], which is now wholly-owned by its acquirer.”