In the coroporate law context, a “poison pill” — formally known as a shareholder rights plan — is a corporate defense strategy used to deter hostile takeover attempts. But what if the poison pill is designed to entrench incumbent senior company management rather than to deter unwanted takeover suitors? In the following guest post, Sarah Abrams, Head of Claims Baleen Specialty, a division of Bowhead Specialty, examines this question and considers the D&O insurance underwriting implications. My thanks to Sarah for allowing me to publish her article as a guest post on this site. Here is Sarah’s article.
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Allegations in a recent Delaware Court of Chancery Complaint (Swimply Complaint) provide an interesting twist on the impact on D&O underwriting risk stemming from an executive’s “poison pill” scheme. The lawsuit, brought by online recreation marketplace Swimply, Inc. (Swimply) against its former CEO, Derek Callow (Callow), alleges that Callow created a poison pill, which made his removal as CEO prohibitively expensive. While poison pills may be valid under Delaware Chancery Law, the strategy is usually used by a board to prevent a hostile takeover, rather than being used by an executive against the company itself.
So, when, like in the case brought by Swimply, a director or officer creates a condition for the board where both action and inaction may harm the company, what should D&O underwriters expect? To appreciate whether there may be increased risk from a Swimply-like poison pill, the following will discuss the history of poison pills, particularly Delaware Chancery law standards for determining validity, the allegations by Swimply against Callow, and potential D&O coverage considerations stemming therefrom.
The Moran Case
Moran v. Household International, Inc.(Moran) was the landmark Delaware Chancery Court decision that first upheld the legality of a shareholder rights plan, a “poison pill.” In Moran, the board of Household International adopted a shareholder rights plan that allowed for the purchase of new preferred shares at a steep discount if any outside investor acquired 20% or more of the company’s stock or launched a tender offer for 30% or more. The alleged intent of the poison pill in Moran was to deter hostile takeovers of Household International by making a majority share purchase prohibitively expensive, giving Household International’s board time to negotiate better prospective deal terms.
Household International shareholders and one of its directors challenged the Moran poison pill as an improper restriction on share transferability and an attempt by the company’s directors to entrench themselves. The Delaware Court of Chancery, and later the Delaware Supreme Court, found that the shareholder rights plan did not violate the Delaware General Corporation Law and also held that Household International’s board acted on an informed basis and in good faith. Moreover, the Moran court determined that the board’s adoption of the poison pill was a legitimate exercise of business judgment. And, although the shareholder rights plan had the effect of deterring certain takeover attempts (especially two-tier offers), that did not render the plan per se invalid.
In sum, Moran affirmed that poison pills may be valid under Delaware’s business judgment rule with consideration of two key elements: (1) the board must act with appropriate deliberation and information; (2) the device must be reasonably anchored in protecting corporate interests (not solely protecting management). For D&O underwriters, the Moran case highlights the potential for poison pills being subjected to enhanced shareholder scrutiny of directors’ loyalty, care, and process.
It also highlights the potential for shareholder disputes when poison pills are created, potentially generating defense-cost exposure for D&O insurers. Even when courts ultimately uphold a shareholder’s rights plan as a valid and informed exercise of business judgment, limiting the likelihood of indemnifiable settlements or damages, defense expenses may still arise in responding to shareholder demands and derivative litigation.
Notably, at least a Moran-based dismissal may mitigate indemnity exposure. The Swimply case, which is dissimilar, raises a question of whether any D&O underwriting exposure can be mitigated when a director or officer makes a poison pill to use on the company they lead.
The Swimply Complaint
The Swimply Complaint alleges that former CEO Derek Callow breached his fiduciary duties by creating an executive-level “poison pill” designed to entrench himself in power. The plaintiff, Swimply, alleges that Callow secretly, and without board approval, amended the employment agreements of three senior executives to expand their severance rights if he were removed as CEO. In particular, the amendments granted each executive twelve months of salary and COBRA coverage upon resignation for “Good Reason,” newly defined to include any change in CEO.
By linking Callow’s own removal to costly severance obligations for multiple executives, Callow allegedly created a financial penalty for the company’s board should it choose to terminate him, effectively making his ouster prohibitively expensive. Swimply asserts that Callow’s amendments violated its bylaws, which reserve authority over executive compensation to the board and prohibit post-termination payments absent board-approved contracts.
When potential investors in Swimply discovered the employment provisions during due diligence, one withdrew, and another delayed and reduced its investment. Swimply then terminated Callow for cause in February 2025, claiming his actions caused material harm, including loss of investor funding and accelerating loan repayment obligations. The Swimply Complaint characterizes Callow’s conduct as a self-interested scheme to deter board oversight and secure his position by engineering contractual consequences that would punish the company for exercising its governance rights.
Discussion
It is first important to note both that the Swimply Complaint is not pled as a derivative action and that Swimply is a private company. As such, coverage for the allegations against former CEO Derek Callow may be barred under the “Insured-versus-Insured” (IvI) exclusion, since the claim is brought by the insured entity (Swimply) against another insured person (its officer). Most private-company D&O policies exclude coverage for such internal disputes under IvI, although carve-outs may be negotiated to include coverage for derivative claims (brought by shareholders on behalf of the company), as well as for direct suits by the company against former executives.
If, however, Swimply’s lawsuit were brought by shareholders, Sides A and B of Swimply’s D&O policy could be triggered and potentially impaired. In that case, Callow’s defense costs incurred in defending fiduciary-duty allegations would likely be covered under Side A. Swimply, as the nominal defendant, could be required under Delaware General Corporation Law §145 to advance or indemnify defense costs for its directors and officers, which would then be reimbursable under Side B of the policy.
If covered, the potential exposure to Swimply’s D&O carriers, given the catch-22 that Swimply was put in by Callow’s “poison pill” may be significant, as the facts that both parties would need to present to demonstrate Callow’s amendment to executive employment agreements was to entrench himself, and not to protect Swimply. Particularly because the application of the Moran case to dismiss Swimply’s complaint on business judgment grounds appears tenuous. Thus, D&O underwriters may want to consider an insured’s poison pill plan, if known, ahead of risk placement.
The views expressed in this article are exclusively those of the author, and all of the content in this article has been created solely in the author’s individual capacity. This article is not affiliated with the author’s company, colleagues, or clients. The information contained in this article is provided for informational purposes only, and should not be construed as legal advice on any subject matter.