D&O INSURANCE ISSUES IN US M&A LITIGATION: THE ‘BUMP UP’ EXCLUSION FOR DISCLOSURE CLAIMS
For more than a decade, it has been the norm in the US in public company M&A transactions for investors in the acquired company to bring shareholder litigation claiming, among other things, that the purchase price was inadequate. While most US public companies have insurance to cover the costs of shareholder litigation, one issue that has become significant in these disputes is whether insurance is available to pay to settle these claims or whether the standard so-called ‘bump-up’ exclusion in policies limits the availability of coverage. That exclusion carves out from coverage any ‘loss’ in which shareholders are simply being paid additional consideration for the sale of their shares in the transaction. Such policies are generally not designed or written to provide coverage for settlements that increase the price paid in the transaction.
Significant recent decisions in the Delaware Superior Court and the US Court of Appeals for the Fourth Circuit have considered the applicability of the bump-up exclusion to investors claims that the disclosures around the transaction were false or misleading under section 14(a) of the Securities Exchange Act. Faced with similar policy language, those courts reached opposite conclusions. Delaware has sided with the insured and concluded that a settlement of disclosure claims is not an increase in deal consideration. In contrast, the Fourth Circuit has concluded that any settlement of M&A claims that involves the payment of cash triggers the bump-up exclusion, regardless of the type of claims that are settled.
Oct-Dec 2025 issue
Cleary Gottlieb Steen & Hamilton LLP