A recurring issue in recent years has been the question of whether there is coverage under D&O insurance for a shareholder appraisal action. Based on differences in policy wording, the analysis of the issue has turned on a variety of different questions. In a July 2021 ruling (discussed here), a Delaware Superior Court Judge had held that there was no coverage under the D&O insurance policy at issue because the underlying appraisal action was not an action “for” a Wrongful Act, as was required under the policy in order for there to be coverage. Now in a brief opinion the Delaware Supreme Court has affirmed the lower court’s decision, leaving in place the ruling that the policy at issue does not provide coverage for the underlying appraisal action. The Delaware Supreme Court’s March 3, 2022 opinion in the Jarden case can be found here.
Jarden Corporation was a holding company for numerous consumer brands. On December 15, 2015, Jarden entered into an agreement to merge with Newell Rubbermaid. A stockholder meeting at which the merger was approved was held on April 15, 2016.
After the merger closed, several Jarden shareholders who had voted against the merger filed appraisal petitions in the Delaware Chancery Court, under Delaware Corporations Code Section 262. The Chancery Court concluded that the fair value of the company at the time of the merger was a price below the price paid the merger. The Court nevertheless concluded that the petitioners were entitled to both pre- and post-judgment interest and entered an appraisal award to petitioner of approximately $177 million, consisting of the fair value of the petitioners’ shares plus interest. Jarden paid the award.
Jarden sought coverage under its D&O insurance program for the interest awarded in the appraisal action as well as the attorneys’ fees it incurred in the proceeding. The insurers denied coverage for the amounts and Jarden initiated a coverage action against the insurers in Delaware Superior Court. The defendants filed a motion to dismiss.
The Superior Court Decision
On July 30, 2021, Delaware Superior Court Judge Abigail LeGrow granted the defendant insurers’ motions to dismiss, holding that the appraisal action was not a claim “for” a Wrongful Act and therefore was not covered under the policy, and that even if there were a claim for a Wrongful Act, the Wrongful Act did not take place until after the Run-Off Date, and was therefore not covered.
In contending that the appraisal action was not a Claim “for” a Wrongful Act, the insurers had argued that to be “for” a Wrongful Act, it must “seek redress in response to, or as a requital of” that act. According to Judge LeGrow’s opinion, Jarden’s counsel conceded at oral argument that the word “for” as used in the policy has the meaning that the insurers advocated. This concession, Judge LeGrow said, “is fatal to Jarden’s coverage claim.”
Even if, as Jarden argued, a “Wrongful Act” means any act that Jarden committed, “an appraisal action does not seek redress in response to, or as a reprisal of, an act.” Accordingly, Judge LeGrow said, “given the term ‘for’ the meaning the parties jointly ascribe to it, there is not coverage under the D&O Policies.”
In reaching this conclusion, Judge LeGrow referenced the Delaware Supreme Court’s October 2020 decision in the Solera case (discussed here) in which the Court commented on the nature of an appraisal action. An appraisal claim, Judge LeGrow said, with reference to the Solera decision, “is purely a creature of statute.” An appraisal proceeding is “neutral in nature” and is designed only to decide fair value; it does not involve any inquiry into claims of wrongdoing.” Though evidence of a flawed sales process is admissible in an appraisal proceeding, that evidence goes only to the question of the weight to be given to the negotiated price – a petitioner need not plead or establish a flawed process.
Jarden appealed Judge LeGrow’s ruling to the Delaware Supreme Court.
The Delaware Supreme Court’s Ruling
In a short, two-page March 3, 2022 opinion, the Delaware Supreme Court affirmed Judge LeGrow’s decision in a unanimous en banc ruling. The Court’s order stated that Superior Court’s decision is “affirmed on the basis of and for the reasons assigned by the Superior Court in its Memorandum Opinion dated July 30, 2021.”
There are now two Delaware Supreme Court opinions (the earlier decision in the Solera case and now the Jarden decision) holding that, under the D&O insurance policies at issue, there is no coverage under the policies for shareholder appraisal actions. However, because of the specific nature of the Court’s rulings each of the cases, the Court’s holdings in the two cases do not necessarily represent a comprehensive conclusion that appraisal actions are simply not covered under D&O insurance policies.
Thus, the Supreme Court’s decision in Solera was very much a reflection of the policy language at issue in that case. The definition of the term “Securities Claim” in the policy at issue in that case contained a reference to a “violation” of a securities law; the policy at issue in the Jarden case, by contrast, had no such reference. (Indeed, the parties in the Jarden action conceded that the appraisal action was a “Securities Claim” within the meaning of the primary policy at issue there.)
By the same token, the rulings in the Jarden case also reflect some case specific features of the parties’ dispute. Judge LeGrow’s interpretation of the word “for” in her conclusion that the underlying appraisal action is not a claim “for” a Wrongful Act was not based on her analysis of the meaning of the word; rather, she gave it the meaning she gave it because Jarden’s counsel had conceded that meaning at oral argument. She did not herself conclude what the word meant; she merely gave the word the meaning “the parties jointly ascribe to it.”
In footnote 30 of her opinion, Judge LeGrow laid out the significance of the fact that she was merely accepted the parties’ agreed meaning of the term, rather than herself determining the meaning. She emphasized that because the parties agreed on the meaning of the term, she was not called upon to interpret it. She added that “making an interpretive ruling that may have precedential value is better left to a court that has the benefit of the parties’ adversarial presentation on the issue.”
Given that the Supreme Court affirmed Judge LeGrow’s opinion “on the basis of and for the reasons assigned” by Judge LeGrow in her opinion, the Supreme Court’s opinion, like the ruling of the court below, simply accepted the parties’ agreed meaning. Accordingly, it would appear to me that the courts’ rulings in the Jarden action would have no controlling precedential value in any later action in which the parties disputed the meaning of the word “for.”
In other words, notwithstanding the fact that there are now two Delaware Supreme Court decisions on the question of whether there is coverage under a D&O insurance policy for a shareholder appraisal action, there would appear to still be room for further disputes on the issue.
There is one further noteworthy thing about the Court’s rulings in the Jarden case and in the Solera case that should not be overlooked. In both of these cases, the Delaware Supreme Court’s conclusions were favorable to the insurers and unfavorable to the policyholders. I highlight this point because numerous commentators (including, for example, me) have made a lot a noise about what a policyholder-friendly jurisdiction Delaware is, and even how insurers might well seek to avoid Delaware’s courts in D&O insurance coverage disputes. At a minimum, these Delaware court rulings do show that policyholders do not always prevail in D&O insurance disputes in the states’ courts, which may provide some comfort for insurers faced with the prospect of litigating coverage claims in Delaware’s courts.
Special thanks to a loyal reader for sending me a copy of the Delaware Supreme Court opinion.