In the wake of the 2019 merger of Viacom and CBS that formed ViacomCBS (later renamed Paramount Global), former shareholders of both CBS and Viacom filed separate D&O liability lawsuits. As discussed here, the CBS shareholders’ lawsuit settled $165.5 million. The separate Viacom shareholders’ lawsuit settled for $122.5 million, and now the battle has shifted to insurance coverage litigation in which the Viacom’s excess insurers contend that coverage for the settlement is precluded by the primary policy’s Bump-Up Provision.
In an interesting August 10, 2023, opinion, Delaware Superior Court Judge Sheldon K. Rennie, applying Delaware law, granted Viacom’s motion for partial summary judgment, holding that the Bump-Up Provision does not preclude coverage for the settlement. As discussed below, Judge Rennie’s holding turned on the nature of the transaction in which Viacom and CBS merged, and, even more significantly, on the contrast between the wording of the Bump-Up Provision, on the one hand, and other policy provisions dealing with merger situations, on the other hand. A copy of Judge Rennie’s opinion can be found here.
The Underlying Lawsuit
After CBS and Viacom completed their merger in December 2019, several Viacom shareholders filed actions challenging the merger. The various lawsuits were later consolidated. The shareholder claimants asserted claims against Viacom’s directors, officers, and controlling shareholders for breach of their fiduciary duties in negotiating and recommending the merger. The court presiding over the consolidated action concluded that there was a reasonable inference that several defendants violated their fiduciary duties by extracting significant governance concessions from CBS in exchange for a lower stock-for-stock exchange ratio. Following the ruling, the parties in the Viacom shareholders litigation entered settlement negotiations and in March 2023 the parties settled the action for $122.5 million.
The Insurance Program
At the relevant time, Viacom maintained a $200 million tower of D&O insurance consisting of a layer of primary insurance and a series of layers of excess insurance. Viacom presented the Viacom shareholders’ lawsuit to its insurers as a claim under their policies. Several of the insurers denied that there was coverage under their policies for the claims on several grounds, including their argument that the coverage under the policy was precluded by the Bump-Up Provision. In June 2022, Viacom and Shari Redstone separately filed actions against certain of the excess insurers, asserting anticipatory breach of contract and seeking declaratory relief. Viacom and Redstone filed motions for partial summary judgment on the Bump-Up Provision issue.
Relevant Policy Language
The primary policy’s definition of Loss specifies that Loss does not include any amount to be paid “for the acquisition or completion of the acquisition of all or substantially all of the ownership interest in, or assets of, an entity, including a Company, was inadequate or effectively increased. However, this paragraph does not apply to Defense Costs.” Though this provision is found in the policy definitions section, Judge Rennie in his opinion in the coverage litigation found it to be, and interpreted it as, a policy exclusion.
The question that developed in the coverage litigation is whether the merger transaction between CBS and Viacom was or was not an “acquisition” within the meaning of the Bump-Up Provision. In considering this issue, Judge Rennie took into account two other references in the primary policy to M&A transactions. The significance of these two provisions, in Judge Rennie’s view, was that both of these two other provisions included language that tracked the language in the Bump-Up Provision with respect to acquisitions, but also separately refer to merger transactions, using language that does not appear in the Bump-Up Provision.
First, Judge Rennie considered the language found in the Merger Objection Claim provision, which defined a Merger Objection Claim, in relevant part, as “a Claim based upon, arising from, or in consequence of any proposed or actual acquisition of a Company, of all or substantially all of the Company’s assets by another entity, or the merger or consolidation of the Company into or with another entity such that the Company is not the surviving entity.”
Second, Judge Rennie considered the language in the Material Changes in Condition provision, which provides in relevant part that certain coverage consequences are triggered, among other things, upon “the acquisition of the Named Insured, or of all or substantially all of its assets, by another entity, or the merger or consolidation of the Named Insured into or with another entity such that the Named Insured is not the surviving entity.”
As explained below, Judge Rennie found the inclusion in these other provisions of a separate reference to mergers using language not found in the Bump-Up Provision to be dispositive of the question whether the Bump-Up Provision applied to the loss arising from the merger of CBS and Viacom.
In an August 10, 2023, opinion, Judge Rennie granted Viacom’s and Redstone’s motions for partial summary judgment.
In granting the plaintiffs’ motions, Judge Rennie found the Bump-Up Provision to be ambiguous. On the one hand, he said, the merger of CBS and Viacom may be, as the Bump-Up Provision says, “an acquisition of all or substantially all of the ownership interest in, or assets of, an entity,” because as a result of the transaction all assets of Viacom vested in CBS and CBS was the surviving corporation. On the other hand, Judge Rennie said, “an acquisition of all or substantially all ownership interests in, or assets of, an entity may “be exclusive of merger transactions, based on the references to mergers in other provisions in the contract.” Given that these two interpretations were both reasonable, the provision was ambiguous; interpreting the ambiguity in the insureds’ favor, as required under applicable rules of insurance policy construction, was sufficient for Judge Rennie to grant the plaintiffs’ motion.
A critical part of Judge Rennie’s analysis of the application of the Bump-Up Provision to the specifics of the merger between CBS and Viacom was his reading of the Merger Objection Claim provision and The Material Changes in Conditions provision. The reference in these two provisions to merger transactions, and the corresponding absence in the Bump-Up Provision of a reference to the merger transactions, raises “the reasonable inference that the Bump-Up Provision does not encompass” the CBS and Viacom merger.
I suspect the court’s resolution of the partial summary judgment motion is particularly frustrating for the excess insurers, as Judge Rennie specifically found that the merger transaction at issue here was the type of transaction that triggers the Bump-Up Provision. Judge Rennie nevertheless granted the plaintiffs’ partial summary judgment motion, not based on an interpretation of the Bump-Up Provision itself or even based on an express conclusion that the Bump-Up Provision did not apply, but instead based on his reading of two other policy provisions and the contrast between those two provisions and the Bump-Up Provision. I can imagine the excess insurers feeling aggrieved that their defense to coverage was defeated by reference to these other provisions which were added to the policy for separate reasons and were meant to address other issues related to concerns entirely separate from the issues the Bump-Up Provision was intended to address.
Because of the excess insurers’ doubtless frustrations, and even more to the point, because of the amount of money at stake in the coverage litigation, the excess insurers undoubtedly will appeal. Of course, the motion that Judge Rennie granted was only a partial summary judgment motion. There are other issues that will need to be addressed at the trial court level before Judge Rennie’s ruling on the Bump Up Provision is ripe for appeal. The appeal undoubtedly will be coming in due course.
From my perspective, I would be remiss if I omitted to mention in connection with this ruling the observation that once again policyholders prevailed in a Delaware court on a question of D&O insurance coverage. Some commentators, including me at various times, have questioned whether the policyholder friendliness of Delaware’s courts would cause insurers to take steps (such as adding choice of law or choice of forum provisions to their policies) to ensure that coverage disputes do not wind up before Delaware’s courts. Significantly, though these possibilities get talked about a lot, so far no insurers have taken significant steps to try to put coverage disputes out of the reach of Delaware’s courts.
It is probably also worth noting that it isn’t necessarily a given that a different court would have reached a different result in this situation. The canons of insurance policy construction in most jurisdictions provide that insurance policies should be read as a whole, and there is no doubt that there is an express and seemingly relevant difference between the Bump-Up Provision (which contains no separate reference to mergers) and the other policy provisions to which Judge Rennie referred (both of which contained separate references to mergers).
One final note. It certainly seems that there is a heck of a lot of coverage litigation about the Bump-Up Provision. Part of the reason for that is that often the underlying matters to which the insurers contend the Bump-Up Provision applies often involve significant amount so money. The sheer dollar size of the transactions involved often compels the fight. But the other reason for the significant numbers of fights over the Bump-Up Provision is that there is a seemingly endless array of kinds of M&A transactions, many of which only fit awkwardly within the terms of the Bump-Up Provision. I will say that after reading so many insurance coverage decision relating to the standard Bump-Up Provision language, the provision could do with a substantial overhaul.
Special thanks to the several loyal readers who sent me a copy of the Viacom decision.