Explore a legal case in M&A where a buyer seeks damages for misrepresentation through their D&O insurance policy. Learn about the complexities and court rulings in this insightful M&A story.
M&A Stories
November 28, 2018
In this M&A story, we explore a case involving a Scottsdale, Arizona company specializing in medical information and risk adjustment services. The company was acquired on November 3, 2015. After the deal closed, the buyer accused two of the seller-directors of financial misconduct that occurred before the acquisition.
The sellers promptly informed their insurance company about the buyer’s demands and sought defense or indemnification under their D&O liability policies. Simultaneously, the sellers requested indemnification from the company as per its bylaws.
These legal disputes eventually led to litigation in Delaware. In the end, the sellers and the buyer reached a settlement. As part of this agreement, the buyer acquired the sellers’ claims in a federal lawsuit against the insurer.
One significant dispute emerged: Did the buyer, as the successor to the sellers, have coverage under the company’s D&O insurance policy for the alleged wrongful acts during the stock purchase negotiation? The crux of the matter hinged on an exclusion clause regarding major shareholders, which excluded coverage for claims by shareholders owning 5% or more of the company.
The insurer argued that this exclusion applied, given that the buyer now owned 100% of the company. However, the buyer contended that the exclusion should apply only to shareholders who owned 5% or more of the company at the time the wrongful acts occurred, which was before the buyer’s 100% ownership.
According to Delaware law, insurance exclusion clauses are disregarded if they are ambiguous. In this case, the court deemed the clause ambiguous because both the buyer’s and the insurer’s interpretations were reasonable.
In summary, the court ruled in favor of the buyer, stating that the buyer was covered under the company’s D&O policy for the sellers’ wrongful acts.
Case Reference:
EMSI Acquisition, Inc. v. RSUI Indemnity Company, C.A. No. 16-1046-LPS, United States District Court, D. Delaware, (January 31, 2018).
By John McCauley: I help people start, grow, buy and sell their businesses.
Email: jmccauley@mk-law.com
Profile: http://www.martindale.com/John-B-McCauley/176725-lawyer.htm
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Check out my book: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles
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