This post was prepared by Frank Reynolds, who has been following Delaware corporate law, and writing about it for various legal publications, for over 30 years.
The Delaware Superior Court recently dismissed Jarden LLC’s bid for D&O insurance coverage for an appraisal suit that was not “for” redress of a “wrongful act” – and even if it was, the act couldn’t have occurred before the sale to Jewel Rubbermaid Inc. closed, ending the coverage period, in Jarden LLC v. Ace American Insurance Co., et al., No. N20C-03-112 AML CCLD opinion issued (Del. Super. July 30, 2021).
In her July 30 opinion, Judge Abigail LeGrow, guided by a recent milestone Delaware Supreme Court opinion, said the underlying shareholder challenge to the price Jarden investors received in 2016 was by nature, a “statutory proceeding”, even if the deal negotiation was “flawed” and the appraisal petitioners won a $177.4 million judgment.
Judge LeGrow wrote that in keeping with the high court’s ruling in a coverage action for an appraisal suit in In Re Solera Insur. Coverage Appeals, 240 A.3d 1121, 1135-36 (Del. 2020), “the only issue before the appraising court is the value of the dissenting stockholder’s shares on the date of the merger,” and no claims of wrongdoing are considered.
Judge LeGrow’s opinion may be of interest to corporate and insurance specialists–-at least for the reason that it was a win of sorts for corporate insurers in what they have complained has been a long, dry season for them in Delaware D&O insurance coverage litigation.
“Although evidence of a flawed negotiation process generally is admissible in an appraisal proceeding, that evidence is relevant to what weight, if any, the Court accords the negotiated merger price,” she noted. “Accordingly, if the Appraisal Action was for any act, the only act from which it arose or for which it could seek redress” is the execution of the merger itself.
The judge said the insurer defense that is “fatal to Jarden’s coverage claim” is Jarden’s previous agreement that “for” a wrongful act meant a claim that sought redress for that act and the appraisal action could only sue over the execution of the merger itself–but that was too late for coverage.
Jarden LLC, a Delaware limited liability company based in Florida, was a holding company whose portfolio included 120 consumer-product brands like Coleman sporting goods, Crock-Pot appliances, Sunbeam, and Yankee Candle. On December 13, 2015, it agreed to a merger in which it became a subsidiary of Newell Rubbermaid Inc. for cash and Newell stock valued at $59.21 per share as of the closing date.
Jarden’s shareholders voted to approve the deal but some petitioned the Chancery Court for appraisal and alleged the sales process leading up to the merger was flawed and unfair.
The Court of Chancery ascribed little weight to the negotiated deal price for purposes of determining Jarden’s value under Section 262 of the Delaware General Corporation Law because:
(i) Jardan’s lead negotiator “got way out in front” of its board and financial advisors in the negotiations,
(ii) there was no pre-signing or post-signing market check, and
(iii) there were challenges associated with valuing the synergies arising from the deal.
For those reasons, the court appraised the petitioners’ shares at $48.31– $11 below the negotiated price—and awarded them $177,406,216.48, consisting of the fair value of their shares plus pre and post judgment interest.
The coverage action
After paying that judgment, Jarden sought to recoup defense costs and interest from its insurers and when it was unsuccessful, filed breach of contract charges against a tower of insurers that provided coverage for securities claims related to the merger if they involved acts that occurred before the closing.
In opposition to the insurers’ motion to dismiss, Jarden argued that the allegations made in the appraisal complaint concerned defects in the merger itself and were lodged before the closing date, so they are covered by the policies. But the judge said the appraisal action was not for an act that occurred before the closing date.
“This conclusion is compelled by the simple fact that If the merger had not closed, none of the dissenting stockholders who submitted Appraisal Demands would have had standing to pursue appraisal,” Judge LeGrow wrote.
Those challenges to the deal process related only to the weight the trial court would give to the deal price, she said in granting dismissal with prejudice because the pleadings could not be cured by amendment.
Although a rare win for insurers, the Jarden ruling’s impact is difficult to predict, partly because it largely defers to the agreed-to meaning of “for” and the Solera opinion’s definition of “wrongful act” rather than address those key terms anew.
In his summary and comments on the Jarden opinion in his Aug. 3 post on his D&O Diary blog, https://www.dandodiary.com, host Kevin LaCroix suggests that Judge LeGrow ”may have approached the dispute here with more than a little wariness… She was the judge who entered the Superior Court opinion in the Solera case – the one that the Delaware Supreme Court overturned in its October 2020 decision.”