By Mark S. Nelson, J.D.
Although the Solera D&O coverage case was decided a week ago, it is worth taking a somewhat closer look at the Delaware Supreme Court’s opinion in which the justices explained the nature of Delaware appraisal actions generally, and in the context of language contained in an excess D&O insurance policy. The singular question on review was whether the costs of an appraisal are coverable under a D&O policy. The justices said they were not because an appraisal action, in the context of the insurance policy’s language, was not a violation of securities law (In re Solera Insurance Coverage Appeals, October 23, 2020, Valihura, K.).
Superior Court proceedings. Vista Equity acquired Solera Holdings, Inc. in 2016, and that merger precipitated an appraisal action by dissenting shareholders. Solera would eventually seek coverage for the costs of the appraisal action from multiple excess insurers. That lawsuit asserted breach of contract and sought a declaratory judgment for coverages of prejudgment interest and other defense costs, although not for the fair value paid to dissenting shareholders that was the basis for the amount of prejudgment interest.
The Delaware Superior Court denied the excess policy insurers’ motion for summary judgment. The court reasoned that an appraisal action was a violation under the excess polices’ definition of "securities claim." The Delaware Supreme Court reversed.
Appraisal proceedings are neutral. The Delaware Supreme Court’s opinion would emphasize the nature of appraisal proceedings. The excess insurers had argued on appeal that, among other things, an appraisal action does not involve a "violation." Solera argued that a "violation" does not require wrongdoing and that the Superior Court correctly found that the appraisal action amounted to an alleged violation of the dissenting shareholders’ right to receive fair value. The Delaware Supreme Court focused on the language of the primary policy issuer’s policy because the excess policies were keyed to that language.
According to the Delaware Supreme Court, the appraisal did not involve a "violation" and, thus, was not a securities claim under the langue of the excess policies. The justices first observed that a "violation" typically requires some degree of wrongdoing.
The justices then discussed the history and text of 8 Del. C. §262, the state’s appraisal statute. The justices explained that Section 262 was enacted in 1899 to prevent a scenario in which a single dissenter could thwart a majority of shareholders’ decision to approve a corporate transaction if unanimous shareholder approval was required.
The justices further explained that the only question in an appraisal action is how to value the dissenters’ shares. To this end, the appraisal law creates a statutory, not common law, action which, by its design, is neutral in character. In Solera’s case, there was no allegation that there was a violation of Section 262 itself.
Moreover, the justices rejected Solera’s argument that the trio of Dell, DFC, and Aruba required an inquiry into wrongdoing in appraisals (i.e., a showing of a deficient sale process). Said the justices: "Although we have stated that a merger price ‘that results from a robust market check, against the backdrop of a rich information base and a welcoming environment for potential buyers, is probative of the company’s fair value,’ we have also emphasized that there is no presumption that the deal price reflects fair value. In fact, in Dell, we said that, ‘we doubted our ability to craft the precise preconditions for invoking such a presumption’" (footnotes omitted).
The justices did not address other issues of contract interpretation because its decision on the question of whether an appraisal action is a violation rendered further discussion moot.
The case is Nos. 413, 2019 and 418, 2019.