The preclusive effect of the “bump-up” exclusion typically found in most D&O insurance policies has been frequently litigated topic. In the following guest post, Barry Buchman, Michael Scanlon, and Jake Todd review recent case law developments relating to the scope of the bump-up exclusion’s preclusive effect. Buchman is a partner, Scanlon is a counsel, and Todd is an associate in the insurance recovery group of Haynes and Boone, LLP. This article is an update of the authors’ prior guest post about the bump-up exclusion on this site, here. I would like to thank the authors for allowing me to publish their author as a guest post on this site. I welcome guest post submissions from responsible authors on topics of interest to this site’s readers. Please contact me directly if you would like to submit a guest post. Here is the authors’ article.
*******************************
Introduction
Over the past ten years, one of the most hotly litigated issues in Directors and Officers insurance has been the scope of the so-called “bump-up” exclusion (“BUE”). According to insurers, the exclusion precludes coverage for settlements of “merger-and-acquisition” (“M&A”) litigation that “bump up” the consideration that was paid to the shareholders of the target entity in the original M&A deal.
As we previously explained, despite what insurers assert, the BUE is not without bounds.[i] For example, whether the exclusion applies may depend on whether the underlying transaction was a pure stock acquisition or instead involved a merger, whether the insured seeking coverage is the target entity in the underlying transaction, and whether the settlement of the underlying M&A litigation really constitutes a payment of increased consideration to the shareholders for their shares.[ii]
Although much of the recent legal news reporting on developments in the case law concerning the BUE conveys the impression that insurers have effectively won the issue, those articles mostly address two decisions from one case, which applies Virginia law.[iii] By contrast, the latest Delaware decisions support policyholder efforts to place boundaries around the exclusion. The court in Viacom Incorporated v. U.S. Specialty Insurance Company, for example, awarded summary judgment to the policyholder because it was ambiguous whether the BUE encompasses mergers in addition to pure acquisitions.[iv] In doing so, the court also noted that a reverse-triangular merger might be a covered merger rather than an excluded acquisition.[v] Similarly, although the court in Harman International Industries, Incorporated v. Illinois National Insurance Company ruled that the underlying transaction was an excluded acquisition rather than a covered merger, the court also ruled that the settlement of the underlying litigation did not represent an increase in consideration for shareholders and, thus, the BUE did not apply.[vi] This article focuses primarily on the Harman decision and its implication for future BUE disputes.[vii]
Harman Background
Harman International Industries entered into an $8 billion merger with Samsung’s American branch.[viii] A subsequent federal stockholder suit accused the company of misleading investors in connection with the transaction.[ix] Harman settled that case for $28 million, and Harman sought coverage for that settlement under its D&O policy. Harman’s insurer claimed that the bump-up exclusion precluded coverage. Among the issues in dispute were the “merger versus acquisition” issue, the “buyer-seller” issue, and the nature of the relief sought and obtained. At the pleading stage, both sides filed dispositive motions to resolve the dispute, but the court denied both sides’ motions and directed the parties to conduct discovery, including on the nature and characteristics of the transaction. After conducting that discovery, the parties filed cross-motions for summary judgment. In January 2025, the court denied the insurers’ motion and granted Harman’s motion.
The Harman Court’s Analysis and the Limits It Places on the Scope of the BUE
The Harman court focused its analysis on the “merger vs. acquisition” issue and the issue of what the underlying settlement represented. The court ruled for the policyholder based on the latter issue and for the insurer on the merger v. acquisition issue. But, even on the merger vs. acquisition issue, the court’s analysis provides a path to coverage for policyholders in future BUE cases. And, through its analysis of whether the underlying settlement was for increased consideration, the court also bolstered the principle that the BUE does not apply to the plaintiffs’ counsel fees portion of underlying settlements of M&A suits. We address these issues below.
- Not a Settlement for Increased Consideration
The Harman court crafted a new factor-based test to analyze whether an underlying settlement represents an increase in underlying transaction consideration. The court examined (1) the language of the settlement; (2) other indications that the settlement amount represents—or does not represent—compensation for an inadequate deal price; (3) the state of the litigation at the time of the settlement; and (4) the composition of the settlement class.[x] The court emphasized that these factors are not a rigid test and that “none are dispositive”[xi]
In Harman, the court found that the underlying settlement did not represent an increase in the underlying transaction consideration.[xii] First, the language of the settlement agreement expressly denied any wrongdoing and liability regarding paying too little for the target’s shares. The settlement agreement instead stated the reason for settling was the conclusion that further conduct of the litigation would be protracted and expensive and it would have been beneficial to avoid the uncertainties of the litigation.[xiii] Second, the litigation was in the early stages, with estimated defense costs for continuing the action between $25 to $30 million.[xiv] Additionally, the court found that, had “the parties intended for the settlement amount to represent compensation for an inadequate deal price,” then the case would have settled for more money. Specifically, according to the damage figures asserted by the plaintiffs under their inadequate deal price theory, the difference in the shares’ actual value versus the deal value would have been $279,534,420—an amount significantly greater than the $28 million settlement.[xv] The court found the settlement amount seemed much more in line with the cost of defending the litigation, rather than in compensating for an inadequate deal price.[xvi]
B. Merger v. Acquisition
The Harman court similarly used a multi-factor test to analyze the “merger vs. acquisition” issue. Specifically, the court considered (1) whether the target entity retained a separate legal existence after the transaction; (2) whether the stockholders of both the target entity and the planned parent entity voted; and (3) how the transaction was referred to and treated by the parties, such as in corporate filings and in underlying litigation filings.[xvii] Crucially, the Harman court refers to these issues as factors, rather than elements. And, consistent with other parts of the court’s decision, “none are dispositive.”[xviii]
The court in Harman reaffirmed the conclusions in Northrop Grumman Innovation Systems, Incorporated v. Zurich American Insurance Company, namely, that (1) the BUE applies to acquisitions but not to mergers; and (2) some M&A transactions constitute mergers, even if they are not “pure” ones, i.e., one-step transactions where the target merges into the surviving corporation.[xix] In Northrop Grumman, the transaction involved two steps. The first was a reverse-triangular merger where the target survived. The second was a merger where the target ceased to exist as an independent entity.[xx] Thus, there is a continuum between Northrop Grumman (a covered merger) and Harman (an excluded acquisition). Factors such as whether the target entity ceases to exist by the end of the transaction and how the transaction is treated for tax purposes may become important for determining where along the continuum a particular transaction falls.
The Harman court ruled that the transaction at issue there was an excluded acquisition, rather than a covered merger. The court focused on the following specific facts surrounding that transaction:
- Harman retained its separate legal existence and become wholly owned by Samsung, after a one-step/simple reverse-triangular merger.
- Only Harman shareholders voted on the cash-for-stock transaction—a fact of consequence because such votes are designed to protect the interest of shareholders who will be cashed out at the end of the transaction.
- The parties to the underlying transaction consistently used the term “acquisition” when referring to the transaction, including in Harman’s Form 8-K filing to the Securities and Exchange Commission.
In contrast to Harman, there may be transactions that, despite not being “pure” mergers, are nonetheless more akin to Northrop Grumman than to Harman. For example, a stock-for-stock transaction, a transaction that qualifies as a tax-free reorganization under Section 368(a) of the Internal Revenue Code, and/or a multistep transaction where a target entity ultimately ceases to exist are more likely to constitute a covered merger than a transaction tracking the facts in Harman.
C. Plaintiff’s Attorney Fees
As we previously have noted, even if the BUE applies to an underlying settlement, a question remains about whether the portion of the settlement reflecting plaintiffs’ counsel fees are still covered. Insurers sometimes argue that the BUE reaches not only settlement payments made to shareholders themselves, but also to plaintiffs’ counsel fees included in the settlement.[xxi]
There is evidence regarding D&O insurance industry custom and practice that supports the view that plaintiffs’ counsel fees are covered unless explicitly excluded.[xxii] Indeed, the fact that certain BUEs expressly include plaintiffs’ counsel fees within the exclusion supports the conclusion that BUEs that are silent do not encompass such fees.[xxiii]
The recent Harman decision lends further support to this position. The court stated, “only the amount of the settlement related to curing the deal price may be excluded from coverage.”[xxiv] The court similarly emphasized that “some portions of the settlement may be related to the deal price, while other portions might not—it’s not an all or nothing analysis.”[xxv] Thus, the Harman court specifically contemplated situations in which the BUE would exclude certain portions of an underlying settlement (such as the portion paid to stockholders) while it would not exclude other portions (such as the amount of plaintiffs’ counsel fees).
Practical Pointers
Policyholders facing coverage denials based on the BUE can take several steps to maximize the chances that the settlement of an underlying M&A litigation is covered.
- Settlement Agreements in Underlying Litigations:
- Check for and highlight any settlement agreement provisions stating that the defendants do not admit liability/wrongdoing but instead seek to avoid litigation costs and uncertainty.
- Analyze all the remedies sought in the underlying litigation, including any demand for nominal damages, as such remedies may have informed the underlying settlement and likely are covered.
- Evaluate the defense budgets in the underlying litigation, as they also may have informed the underlying settlement as noted in Harman.
- Covered merger rather than an excluded acquisition:
- Look for facts that distinguish the underlying transaction from a pure stock or asset acquisition and a straightforward reverse-triangular merger; for example, analyze whether there were additional steps beyond an initial reverse-triangular merger, where the target entity ultimately ceased to exist.
- Analyze whether the underlying transaction qualified as a tax-free reorganization under Section 368(a) of the Internal Revenue Code.
Barry Buchman is a partner, Michael Scanlon is Counsel, and Jake Todd is an associate in the insurance recovery group of Haynes and Boone, LLP. The opinions expressed in this article are solely those of the authors and not those of Haynes and Boone, LLP, any of its clients, or any of the other members of the firm. This article also does not constitute or provide legal advice.
[i] Barry Buchman & Michael Scanlon, Guest Post: Avoiding Bumps in the Road to Coverage: Limitations on the “Bump-Up Exclusion,” The D&O Diary (Dec. 28, 2021) (“2021 BUE Article”).
[ii] Id.
[iii] For examples of articles assuming that the insurers have prevailed on this issue, see e.g., Abraham Gross, Towers Watson Ruling Energizes Bump-Up Supporters, Critics, Law360 (March 14, 2024); Abraham Gross, Towers Watson Reversal Bolsters Bump-Up Exclusions, Law360 (May 10, 2023). The decisions applying Virginia law are Towers Watson & Company v. National Union Fire Insurance Company of Pittsburgh, Pennsylvania, 67 F.4th 648 (4th Cir. 2023), and Towers Watson & Company v. National Union Fire Insurance Company of Pittsburgh, Pennsylvania, Case No. 1:20-cv-810 (AJT/JFA), 2024 WL 993871 (E.D. Va. Mar. 6, 2024).
[iv] See Viacom Inc. v. U.S. Specialty Ins. Co., No. N22C-06-016 SKR CCLD, 2023 WL 5224690, at *6 (Del. Super. Ct. Aug. 10, 2023) (“Viacom”).
[v] Id. at *8 n.91.
[vi] See Harman Int’l Indus., Inc. v. Illinois Nat’l Ins. Co., C.A. No. N22C-05-098 PRW CCLD, 2025 WL 84702, at *3–4 (Del. Super. Ct. Jan. 3 2025) (“Harman”).
[vii] On February 6, 2025, the insurers in Harman appealed to the Delaware Supreme Court. We do not expect a decision in that appeal until 2026.
[viii] Amie Tsang, Samsung to Buy Harman International in an $8 Billion Bet on Cars, N.Y. Times, Nov. 14, 2016, https://www.nytimes.com/2016/11/15/business/samsung-auto-industry-harman-automotive.html.
[ix] Jeff Montgomery, Del. Court Rules Against Insurers In Harman ‘Bump-Up’ Case, Law360 (Jan. 3, 2025).
[x] See Harman Int’l Indus., Inc., 2025 WL 84702, at *10.
[xi] Id.
[xii] Id.
[xiii] Id. at *11.
[xiv] Id.
[xv] Id.
[xvi] Id. Notwithstanding the victory here by the policyholder, carriers may argue that the court put the final death knoll in the “buyer vs. seller” distinction. However, the court here has done no such thing. The court did not have available to it any of the custom and practice evidence available in the Gardner Denver case. See 2021 BUE Article, supra note 1.
[xvii] Id. at *8.
[xviii] Id. at *10.
[xix] Northrop Grumman Innovation Sys., Inc. v. Zurich Am. Ins. Co., No. CV N18C-09-210, 2021 WL 347015, at *21–22 (Del. Super. Ct. Feb. 2, 2021) (“Northrop Grumman”).
[xx] Northrop Grumman Innovation Sys., Inc., 2021 WL 347015, at *21.
[xxi] See 2021 BUE Article, supra Note 1.
[xxii] Id.
[xxiii] Id. (“Some jurisdictions find that an insurer’s failure to use available language expressly excluding coverage implies its intent to provide coverage.”)
[xxiv] Harman Int’l Indus., Inc., 2025 WL 84702 at *10.
[xxv] Id.