Delaware Supreme Court Holds That Appraisal Actions Do Not Constitute “Securities Claims” Covered by D&O Policy

The Delaware Supreme Court reversed a decision of the state’s Superior Court, holding that an appraisal action arising from Vista Equity Partners’ acquisition of Solera Holdings, Inc. (Solera) did not fall within the definition of a “Securities Claim” for the purposes of coverage under Solera’s primary and excess directors’ and officers’ insurance policies (D&O Policies). The decision cautions that such policies should be carefully reviewed on a periodic basis, and that would-be buyers should do the same during diligence.

Solera was acquired by Vista Equity Partners in March 2016. At the time, the Company’s primary D&O Policy covered any “Loss resulting solely from any Securities Claim made against an Insured during the Policy Period for a Wrongful Act” and defined a “Securities Claim” to cover “any actual or alleged violation of any federal, state or local statute, regulation, or rule or common law regulating securities, including but not limited to the purchase or sale of, or offer to purchase or sell, securities.” A majority of Solera’s stockholders approved the merger, and the transaction closed at $55.85 per share.

Several days later, a number of stockholders filed an appraisal action to determine the fair value of their shares. The stockholders asserted that the fair value at the time of the merger was $84.65 per share; Chancellor Andre G. Bouchard determined after trial that the fair value was $53.95 per share. After the trial, Solera requested coverage from its carriers, not for the judicially determined fair value of the shares, but for the prejudgment interest amount accrued on that payment and the defense expenses incurred in defending the action. The insurers denied coverage, rejecting Solera’s assertion that expenses incurred in the appraisal case were covered by the definition of “Securities Claim” in the D&O Policies.

Solera soon filed a breach of contract claim, contending that the appraisal action constituted a Securities Claim because, “among other things, the petitioners alleged a violation of Delaware’s appraisal statute, which is a law regulating securities, and the petitioners claimed a host of supposed securities violations in connection with the sales process.” The insurers argued in response that there was no “violation” of any law regulating securities because there was no finding of “wrongdoing.” In support, the insurers pointed to DGCL Section 262 which they asserted reflected a neutral proceeding in which a court merely adjudicates the fair value of a company’s shares on the date of a merger or acquisition without a finding of “wrongdoing.” The Superior Court agreed with Solera, holding that a “violation” under the policy did not require any allegation of “wrongdoing,” but the Supreme Court reversed, finding:

  • An appraisal action is neutral in nature, and not asserted based on any violation of law because the word “violation” inherently requires some element of wrongdoing. Appraisal under Section 262 is a remedy that “does not involve a determination of wrongdoing.”
  • Because the appraisal action did not involve the Court’s adjudication of any wrongdoing by Solera, it was not premised on a “violation” of law and thus was not a “Securities Claim.”
  • The remaining issues raised by the parties regarding prejudgment interest and defense expenses were moot upon the determination that appraisal actions do not fall within the definition of “Securities Claim.”

The Solera litigation is a reminder of the importance of precision in definitions in D&O Policies. In particular, companies contemplating a merger or acquisition should examine the target’s insurance policies with these considerations in mind. In light of the Court’s determination that appraisal proceedings do not involve an “adjudication of wrongdoing” and therefore would not fall within the definition of a “Securities Claim,” companies and insurers alike should take another look at how best to approach D&O coverage to adequately protect their interests.