In a closely watched insurance coverage dispute, the Delaware Supreme Court reversed a lower court rulings and held that an appraisal proceeding is not a “Securities Claim” within the meaning of the defendant company’s D&O insurance policy and therefore that the proceeding is not a covered claim under the policy. Because it ruled there is no coverage, the Court did not address the other more controversial aspects of the lower court’s ruling. The Supreme Court’s October 23, 2020 opinion in In re Solera Insurance Coverage Appeals can be found here.

Background

Vista Equity acquired Solera Holdings in March 2016 for an acquisition price of $55.85 per share. Shortly after the merger was announced in September 2015, plaintiff shareholders filed a class action lawsuit against Solera and certain of its directors and officers alleging that the defendants had breached their fiduciary duties in connection with the merger agreement. That action was later dismissed for failure to state a claim.

After the transaction closed, several shareholders who objected to the merger filed an appraisal action under Delaware General Corporations Code Section 262 seeking a determination of the fair value of their shares. Section 262 provides that, subject to certain conditions and qualifications, any shareholder voting against a merger on the grounds that the consideration is inadequate “shall be entitled to an appraisal by the Court of Chancery of the fair value of the stockholder’s shares of stock.” The petitioners contended that the fair value of Solera’s shares was $84.65 per share.

In July 2018, the Delaware Court of Chancery issued an opinion holding that the fair value of Solara’s shares as of the date of the transaction closing was $53.95 per share, an amount less than the merger price of $55.85. The Chancery Court ordered Solera to pay the appraised amount plus pre-judgment interest of $38.3 million. In defending the appraisal action, Solera incurred legal fees and expenses over $13 million.

At the relevant time, Solera maintained a program of D&O insurance, consisting of a layer of $10 million primary insurance and multiple layers of excess insurance, for total limits of $55 million. Solera sought reimbursement from its D&O insurers for the pre-judgment interest award and the defense fees incurred in connection with the appraisal proceeding. The insurers denied coverage for the amounts, contending among other things that the appraisal action is not a “Securities Claim” within the meaning of the policy. Solera initiated an action in Delaware Superior Court against the insurers seeking a judicial declaration that the amounts were covered under the policies. The primary insurer ultimately settled with Solera, so the action proceeded as to the remaining excess insurers. The parties filed cross-motions for summary judgment.

The Superior Court’s Rulings

As discussed here, in a July 31, 2019 opinion, Superior Court Judge Abigail LeGrow denied the summary judgment motions. Among other things, Judge LeGrow rejected the insurers’ argument that the appraisal action was not a “Securities Claim” for which the policy provided coverage. The insurers had argued that an appraisal action is not a claim for a “violation” of any federal, state, or local statute, regulation, or rule pertaining to securities, and therefore does not meet the policy’s definition of “Securities Claim.” Judge LeGrow concluded that “a demand for an appraisal is an allegation that the company contravened [the right to ‘fair value’] by not paying shareholders the fair value to which they were entitled.” She concluded that an appraisal action is a claim against a company for a violation of the law, and therefore that it is a Securities Claim within the meaning of the policy.

Judge LeGrow also concluded that the policy provided coverage for the pre-judgment interest amount, even though the appraisal award itself was not covered under the policy. Finally, Judge LeGrow rejected the insurers’ argument that there is no coverage under the policy for the defense costs the company incurred before it provided the insurers with notice of the appraisal action. She concluded Delaware law implies a prejudice requirement in the policy’s consent to counsel provisions. Because, she concluded, factual issues remain regarding the prejudicial effect of the lack of consent to counsel, Judge LeGrow denied summary judgment on the consent to counsel issue.

The insurers appealed Judge LeGrow’s decision.

The Relevant Policy Language

Solera’s excess D&O insurance policies are follow-form policies, meaning that the language of the primary policy controls the availability of coverage under the excess policies. The primary policy defines a “Securities Claim” as a claim:

made against [Solera] for any actual or alleged violation of any federal, state or local statute, regulation, or rule or common law regulation securities, including but not limited to the purchase or sale of, or offer to purchase or sell, securities, which is: (a) brought by any person or entity resulting from, the purchase or sale of, or offer to purchase or sell, securities of [Solera]; or (b) brought by a security holder of [Solera] with respect to such security holder’s interest in securities of [Solera].

The October 23, 2020 Opinion

In a unanimous October 23, 2020 opinion written by Justice Karen L. Valihura, the Delaware Supreme Court reversed the lower court, ruling that the appraisal action is not a claim for a “violation” and therefore that the appraisal action does not fall within the definition of a “Securities Claim.” The Supreme Court ruled further that because the appraisal action is not a securities claim and therefore is not covered under the policy, the remaining issues (that is, the questions relating to pre-judgment interest and pre-notice defense expenses)  are moot.

In concluding that an appraisal action is not a claim for a “violation,” the Court said that this conclusion is “compelled by the plain meaning of the word ‘violation,’ which involves some element of wrongdoing, even if done with an innocent state of mind.” It is also “compelled,” the Court said, “by section 262’s historical background, its text, and by a long, unbroken line of cases that hold that an appraisal under section 262 is a remedy that does not involve a determination of wrongdoing.” Appraisal, the Court said, that is “limited to the determination of the fair value of the dissenters’ shares as of the effective date of the merger or consolidation.”

Appraisal proceedings, the Court said, are “neutral in nature.” While courts may consider evidence relating to the price negotiation process leading to the signing of a transaction, “this evidence bears on the weight, if any to be accorded to the deal price.” Accordingly, appraisal decisions analyzing the merger process do not support the contention that appraisal actions adjudicate wrongdoing.”

Discussion

There is a preliminary point that needs to be made before discussing the Supreme Court’s opinion, and that is the fact that appraisal actions are filed against the corporate entity involved; the company’s directors and officers are not parties to the proceeding. Because the respondent company is the only party, there is coverage under the company’s D&O insurance policy for an appraisal action, if at all, only under the policy’s Entity Coverage. Entity Coverage in a public company D&O insurance policy provides coverage only for “Securities Claims.” So that is why the relevant coverage question here is whether or not an appraisal action is a “Securities Claim.” There is no coverage under the policy for an appraisal action if the proceeding is not a “Securities Claim.”

The question of whether or not an appraisal action is a “Securities Claim” is an important question. The dollar figures involved in this case show more than anything else what is at stake here. Whether or not there is insurance available for these amounts has huge implications for insurers’ potential loss costs, not just in this case, but in other appraisal cases as well.

The outcome of this case is a big win for the insurers, both in this case, and in general. There is a troublesome question remaining though. Because of the Supreme Court’s ruling on the “Securities Claim” issue, the Court concluded that the remaining issues – the pre-judgment interest and the consent to counsel issues – were moot, and therefore it did not reach those issues. So where does that leave the Superior Court’s ruling on those issues? The Superior Court’s ruling was reversed only with respect to the “Securities Claim” issue. Are the Superior Court’s rulings on those other issues still intact? May the Superior Court’s rulings be cited in other proceedings? May policyholders rely on the Superior Court’s rulings in trying to argue that, say, pre-judgment interest is covered even if the amount to which the interest accrued is not covered, or to argue that Delaware law implies a prejudice requirement in the consent to counsel provisions?

As a strict matter of citation, the way to refer to the Superior Court’s rulings on the other issues is simply to note that the opinion was reversed on other grounds. But though there is a conventional way to refer to parts of a decision that were not reversed, may the parts of the decision that were not reversed be relied upon? I suspect that these are questions that going to have to get sorted out over time.

While the Supreme Court’s decision in this case is a big win for the insurers, it may not be as significant now as it might have been in the past. As detailed here, during the period 2010 to 2016, the number of appraisal actions filed in Delaware increased every year, but beginning in 2017 and thereafter, the number of appraisal actions has declined. The decline is the result of recent Delaware Supreme Court decisions in which the court reversed lower court appraisal action rulings where the lower court had ruled that the fair value exceeded the deal price and indicated instead that the deal price should be given substantial weight, at least where the sales process was “robust.” The upshot is that there are far fewer appraisal actions than there were just a few years ago.

There is a larger significance to this case in the fact that the Delaware Supreme Court reversed a policyholder-friendly decision of the Delaware Superior Court. Over the last several years, a perception has emerged that the Delaware Superior Court is a policyholder-friendly forum for the resolution of insurance coverage disputes. By way of example, as discussed here, in the long-running Dole Foods insurance coverage dispute, the Superior Court has issued a long and continuous string of policyholder-favorable rulings. Indeed, the Superior Court’s ruling in this case was among the recent rulings that had contributed to the impression that the Delaware Superior Court is a policyholder-friendly forum. The fact that the Superior Court’s ruling in this case was reversed by the Supreme Court does suggest that maybe Delaware might not be quite as policyholder friendly of a forum as seemed to be the case.

In that regard, it should be noted that the Solera case is not the only recent insurance coverage dispute in which the Delaware Supreme Court reversed a policyholder friendly decision by the Delaware Superior Court; as discussed here, in October 2019, the Delaware Supreme Court reversed a policyholder friendly Delaware Superior Court ruling in the Verizon insurance coverage dispute (which, ironically, also involved the definition of the term “Securities Claim.”) Two decisions arguably is not enough to represent a pattern, but the fact that in both cases the Delaware Supreme Court reversed a policyholder friendly Superior Court decision seems significant to me. At a minimum, it should temper somewhat the assertion that Delaware is a policyholder friendly forum in which to address insurance coverage disputes.

Special thanks to the several loyal readers who provided me with a copy of the Delaware Supreme Court’s opinion in the Solera case.