aus3An exclusion sometimes found in D&O insurance policies precludes coverage for claims made by shareholders who have a specified percentage of ownership in the insured company. This type of exclusion is called a Major Shareholder Exclusion (or, sometimes, the Principal Shareholder Exclusion). An interesting May 6, 2015 decision (here) by the Supreme Court of Victoria (Melbourne) addressed the interesting question of what is the relevant point in time for determining the ownership percentage – at the time the claim is made or at the time the wrongful acts allegedly took place? The considerations discussed in the decision raise a number of issues about this type of exclusion. A May 15, 2015 memo from the Allens law firm about the decision can be found here.



Effective June 20, 2008, Oxiana acquired all of the outstanding shares of Zinifex. Following the transaction, Oxiana was renamed OZ Minerals Ltd. (“OZ Minerals”) and Zinifex was renamed Oz Minerals Holdings Ltd. (“OZ Holdings”).


In February 2014, an OZ Minerals shareholder filed a representative action in the Federal Court of Australia against OZ Minerals alleging that there were misrepresentations in the merger transaction documents. OZ Minerals in turn filed a separate contribution proceeding against OZ Holdings and certain of its former directors and officers.


Prior to the merger transaction, OZ Holding (then Zinifex) had a directors and officers liability insurance policy in place with a policy period from March 31, 2008 to March 31, 2009. In connection with the merger transaction, OZ Holding purchased a discovery period endorsement which extended the policy’s expiration date to June 20, 2015. A run-off exclusion was also added to the policy at the same time providing that the insurer was not liable for any claim with respect to a wrongful act committed after June 20, 2008 (the date of the merger transaction).


The defendants in the contribution action submitted the claim to the D&O insurer. The D&O insurer denied coverage for the claim in reliance on the policy’s major shareholder exclusion. OZ Holdings commenced an action in the Supreme Court of Victoria (Melbourne) seeking a judicial declaration that the insurer is obliged to indemnify them against liability arising from the contribution claim.


The policy’s Major Shareholder and Board Position Exclusion provided that:


The Insurer shall not be liable to make any payment under this policy in connection with any Claim brought by any past or present shareholder or stockholder who had or has:


  • Direct or indirect ownership of or control over 15% [or] more of the voting shares or rights of the Company or of any Subsidiary, and
  • A representative individual or individuals holding a board position(s) with the company.


The parties agreed that neither of the two conditions were met before June 20, 2008.  The parties agreed that the first condition was met at the time the claim was made (since OZ Minerals acquired all of OZ Holdings shares in the merger transaction). The parties disputed whether the second condition was met at the time the claim was made, but the Court concluded that the second condition had been met at the time the claim was made as well.


The crux of the parties’ dispute was their disagreement about the point or points in time at which a claimant is to be assessed against the conditions in the exclusion clause. The declaratory judgment action plaintiffs contended that the exclusion was only intended to apply to exclude coverage for claims brought by claimants who satisfied the conditions at the time of the wrongful acts that gave rise to the contribution claim (that is, before June 20, 2008). The insurer argued that the words in the exclusion disclose an intention that it should operate at both the time of the alleged wrongful acts and the time the contribution claims were brought, so that coverage would be precluded for shareholders holding the specified share percentage either at the time of the wrongful act or at the time of the claim.


The May 6 Ruling 

In its May 6, 2015 opinion, the Court agreed with the insurer’s interpretation, holding that the exclusion applied if the two conditions were met either at the time of the wrongful acts or at the time the claim was made.   The court said that the insurer’s interpretation was “grammatical” and “accords with the structure of the policy.”


An important part of the Court’s analysis was its consideration of the insurer’s rationale for its interpretation of the exclusion (what the Court called the “commercial rationale”). The insurer had argued that it an insurer could reasonably seek to protect itself from a claim that might be the result of collaboration between a claimant major shareholder and the defendant company or that could involve the misuse of confidential company information to the claimant’s advantage. The insurer also contended that an insurer could reasonably seek to preclude coverage for a claim brought by a shareholder who might have been in a position to influence the company’s operations at the time the wrongful acts occurred. The Court said “the suggested commercial rationale is objectively reasonable.”



There are several kinds of exclusions that can be found in D&O insurance policies precluding coverage for claims brought by certain claimants. For example, a standard D&O policy exclusion precludes coverage for claims brought by one insured against another insured. Some policies (typically those issued to banking institutions) preclude coverage for claims brought by regulators (the so-called regulatory exclusion). The major shareholder exclusion at issue in this case is another type of exclusion precluding coverage for claims asserted by a specified type of claimant.


This case illustrates the fundamental problem with the inclusion of a major shareholder exclusion on a D&O insurance policy. It can wind up precluding coverage for the very type of claim for which the insurance policy was designed. OZ Minerals had filed the contribution claim against OZ Holdings and its former directors and officers because OZ Minerals itself had been sued in a shareholder misrepresentation claim. The contribution claim in turn sought to hold the defendants in that action liable for their alleged responsibility for the misrepresentations alleged in the shareholder claim. Those are the very types of claims and allegations for which policyholders purchase D&O insurance, so that they can be protected from those types of claims.


The insurer in this case would no doubt justify the exclusion and its preclusive effect by the fact that OZ Holdings is suing its own 100%-owned subsidiary for contribution – a claim, the insurer might argue, that makes sense only as a mission by OZ Minerals to get access to OZ Holdings’ insurance policy. However, the exclusion at issue here precluded coverage not just for the claim against OZ Holdings but also for the claim against the former directors and officers – that’s what I mean  about the exclusion precluding the very type of claim for which these insurance policies are purchased.


From the policyholder perspective, the preferred approach is to have the major shareholder exclusion removed. However, while the preferred approach from the policyholder’s perspective is to remove the exclusion, obtaining a policy without a major shareholder exclusion is not always an option. If the exclusion’s removal is not an available option, there are a variety of ways the exclusion’s preclusive effect might be limited. For example, the ownership percentage could be increased to a higher level (although that would not have made a difference here, as OZ Holdings owned 100% of OZ Minerals).


In addition, the exclusion’s operation could be made subject to additional conditions, as was the case with the exclusion at issue here. Many major shareholder exclusions are conditioned only on a requirement that the claimant have a specified ownership percentage. Here, the exclusion was also conditioned on the requirement that the major shareholder also have board representation.


Another way the impact of the exclusion can be limited is by narrowing the point or points in time when the conditions can be met. The court here determined that the exclusion at issue was meant to address both past and present shareholders, and as the court found the conditions could be satisfied either if the shareholder had the specified ownership percentage at the time of the Wrongful Act or at the time the claim was made. More typically, the major shareholder’s preclusive effect is addressed to ownership only at the time the claim was made.  Typically, a major shareholder exclusion will not (as the exclusion here did) refer to past shareholders — although there are some standard versions of the exclusion out there in the marketplace that preclude coverage for both present and past shareholders owing the requisite percentage. Narrowing the exclusion’s wording so that it applies only to shareholders that have the requisite ownership percentage at the time the claim is made would at least eliminate the preclusion of coverage for claims by shareholders who previously had the requisite percentage of ownership prior to the claim but who did still have that ownership percentage when the claim is made.


2015 ACI D&O Conference in New York: On September 17 and 18, 2015, the American Conference Institute will be holding is 19th Forum on D&O Liability in New York. This annual event features an all-star line-up of speakers and will be co-chaired by my friends, Diane Parker of AWAC and Doug Greene of the Lane Powell law firm. Readers of the D&O Diary are entitled to a $100 discount off registration if they mention discount code DOD100. Information about the event including registration instructions can be found here. The event brochure can be found here.


ICYMI: Earlier today I published a post discussing a recent Delaware Supreme Court addressing questions surrounding the liabilities of independent directors in the M&A context. Due to user error (meaning, I goofed) no emails went out about this post. In case you missed it, the post can be found here.