Stock buyer covered as successor to seller under target D&O policy

On November 3, 2015, Buyer entered into a stock purchase agreement pursuant to which Buyer became the 100% shareholder of Target. After the sale closed, Buyer sent demand letters to Management Sellers, former Target Directors, seeking indemnification for financial misconduct allegedly committed by the Management Sellers prior to the sale of Target to Buyer.

The Management Sellers provided Insurer with prompt notice of Buyer’s demand letters and, in turn, demanded that Insurer provide the Management Sellers with a defense or indemnification under their director and officer liability insurance policies with Insurer. At the same time, the Management Sellers demanded indemnification from Target pursuant to the company’s bylaws.

These claims involving Buyer, Management Sellers, Target and Insured ended up in Delaware litigation. Subsequently, the Management Sellers and Buyer entered into a settlement agreement, pursuant to which Buyer was assigned all right, title, and interest in the Management Sellers’ claims in Management Sellers’ Delaware federal lawsuit against Insurer.

After the dust cleared one of the major disputes involved whether Buyer, as successor to Management Sellers, pursuant to the settlement agreement, was covered under Target’s director and officer liability insurance policy covering wrongful acts by Management Sellers during the negotiation of the stock purchase agreement. The dispute centered upon the major shareholder’s exclusion clause where the policy excluded coverage for claims made by a shareholder owning 5% or more of Target.

Insurer claimed that the coverage exclusion clause applied (and thus Buyer was not covered) since Buyer owned 100% of Target. Buyer disagreed and argued that the exclusion applied to claims made by Target shareholders who owned 5% or greater of Target when the alleged wrongful acts occurred (which was before Buyer acquired 100% of Target on November 3, 2015).

The court said that under applicable Delaware law, an exclusion in an insurance policy does not apply if the exclusion clause was ambiguous; because in cases of ambiguity, the court will interpret the clause against the interests of the drafter of the exclusion, Insurer, and in favor of Buyer, the insured. In this case the court held that the clause was ambiguous because both Buyer and Insurer’s interpretation of the exclusion clause was reasonable.

The bottom line: Buyer was covered under the D&O policy of Target for the wrongful acts of Management Sellers.

This case is referred to as EMSI Acquisition, Inc. v. RSUI Indemnity Company, C.A. No. 16-1046-LPS, United States District Court, D. Delaware, (January 31, 2018).

Comment. In this case, Buyer is seeking to recover some of its loss from the alleged breach of Management Seller’s stock purchase agreement representations and warranties from the Target’s D&O insurance policy.

By John McCauley: I help people start, grow, buy and sell their businesses.



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