Supreme Court of Delaware Reverses Lower Court’s Ruling, Clarifies “Relatedness” Standard
The Supreme Court of Delaware, applying Delaware’s “meaningful linkage” standard, has held that wrongful acts alleged in a securities class action were meaningfully linked to wrongful acts alleged by the SEC, such that the later reported class action was deemed related to the insured’s earlier notification of the SEC investigation. In re Alexion Pharm., Inc., 2025 WL 383805 (Del. Feb. 4, 2025).
The insured, a pharmaceutical company, had two towers of D&O insurance covering consecutive periods. The first tower (“Tower 1”) provided $85 million in coverage, and the second tower (“Tower 2”) provided $105 million in coverage. During the Tower 1 coverage period, the SEC served the company with a subpoena that requested, among other things, information relating to the company’s sales tactics and grant-making worldwide for one of its drugs (the “SEC Subpoena”). Later, during the Tower 2 coverage period, stockholders filed a securities class action against the company (the “Class Action”). The Class Action alleged that the company had violated the Exchange Act and SEC Rules by engaging in unethical and illegal sales and lobbying practices. The company reported the SEC’s investigation and the SEC Subpoena to the Tower 1 insurers (the “2015 Notice”), and it reported the Class Action to the Tower 2 insurers, during the respective periods.
The primary insurer treated both the SEC Subpoena and Class Action as falling under Tower 1 on the grounds that the Class Action arose from the same circumstances, “Wrongful Acts,” and “Interrelated Wrongful Acts” that the company reported with the 2015 Notice. After the company settled the underlying disputes, it filed a coverage action against the insurers, arguing that the two were unrelated. The trial court ruled in favor of the company and placed the Class Action in Tower 2. In so holding, it determined that the connection between the SEC Subpoena and Class Action was merely “tangential” and not meaningful, even though the Class Action plaintiffs used the SEC’s findings as evidence to show a pattern of illegal conduct in the company’s sales and marketing of the drug.
On appeal, the court agreed that the “meaningful linkage” standard was the appropriate standard but disagreed with the lower court’s application. It first held that the 2015 Notice was a notice of circumstance, and that by treating it as a “Claim,” the lower court narrowed the scope of the inquiry to the wrongful acts alleged in the SEC Subpoena, when the inquiry should have focused on the wrongful acts disclosed in the 2015 Notice. The court then held that the Class Action alleged the same wrongdoing investigated by the SEC and disclosed with the 2015 Notice, i.e.., the company’s allegedly improper sales tactics, including its grant-making activities. The court held that “it does not matter whether the SEC and the stockholder plaintiffs are different parties, asserted different theories of liability, or sought different relief. It is the common underlying wrongful acts that control.” The court also held that the matters overlapped even though they involved non-identical time periods, concluding that “while not perfectly identical, they do meaningfully overlap.”
