The Delaware Supreme Court ruled Wednesday that RSUI Indemnity Co. must pay $12,321,096 to Dole Corp. toward the cost of a legal settlement with former shareholders who alleged they were cheated out of potential profits when executives manipulated the stock price before taking the company private.
The high court rejected RSUI’s argument that coverage is not owed because public policy demands that corporate executives should not be allowed to profit from fraudulent acts by passing the cost along to their company’s directors and officers insurer.
The court said, in fact, Delaware insurance’s statute specifically allows corporations “to purchase D&O insurance for liabilities arising from bad-faith conduct.” That does not mean the state condones fraud, the high court said in a 5-0 decision written by Justice Gary F. Traynor.
“But concluding certain conduct, including a director’s breach of loyalty sounding in fraud, is not uninsurable on public-policy grounds is notably different than placing a stamp of approval on that conduct,” the high court said. “Hence, in the absence of clear guidance from the General Assembly to the contrary, we must reject RSUI’s invitation to void its contractual obligations on public-policy grounds.”
The dispute stems from Dole Chief Executive Officer David H . Murdock’s and President Michael Carter’s actions when they converted the company from public ownership to private as part of a merger agreement. Murdock, who already owned about 40% of the shares of the company, purchased the remainder from investors for $13.50 per share.
After the transaction closed in November 2013, Dole stockholders filed lawsuit in the Delaware Court of Chancery alleging that Murdock and Carter manipulated the value of Dole stock before the sale in order to purchase the outstanding shares at an artificially low price. After a nine-day trial, the court ruled that Murdock and Carter had breached their duty of loyalty to shareholders through a series of unfair and fraudulent actions. The judge ordered them to pay the plaintiffs damages of $148,190,590 — equivalent to an additional $2.74 per share.
Some issues were unresolved by the ruling, but Murdock and Carter settled the lawsuit by agreeing to pay the former shareholders the amount of damages that the court ordered.
Investors who sold their Dole stock before the merger was completed filed a separate lawsuit, alleging that Murdock’s and Carter’s actions had deflated the value of their shares as well. Dole negotiated a settlement, agreeing to pay $74 million plus interest to those investors.
RSUI, headquartered in Atlanta, held the eighth layer of coverage in Dole’s D&O insurance tower. It joined five other excess carriers that refused to pay for Dole’s settlement costs, instead filing a lawsuit seeking a declaratory judgment that no coverage was owed.
In a series of decisions, the Delaware Superior Court rejected the insurers’ claims and entered judgment in favor ofDole. By the time RSIU filed an appeal last March, it was the only carrier left that had not settled with Dole or paid its policy limits.
RSUI argued that the case should be decided under California law because Dole’s headquarters is located in the Los Angeles suburb of Westlake Village. The Supreme Court, however, said that argument underrates the significance of Dole’s status as a Delaware corporation.
The carrier argued that even under Delaware law, Dole’s settlement with the former stockholders was not insured because of a “fraud/profit exclusion” in the policy. The Supreme Court found, however, that the Superior Court’s memorandum opinion was not a final, non-appealable ruling that barred coverage.
RSUI argued that even if the policy did not specifically exclude coverage, public policy in Delaware demands that the court conclude that fraudulent acts are uninsurable.
The Supreme Court noted that more than 50% of public corporations and 63% of Fortune 500 companies are incorporated in Delaware. The state legislature in Delaware, as well as state lawmakers in other states, have passed laws that allow corporations to purchase insurance to indemnify their directors and officers even from actions that the corporations themselves would not be allowed to indemnify.
The Supreme Court said “in the high-stakes arena of stockholder litigation, a blanket prohibition, on public-policy grounds, against insuring for losses arising from a director’s or officer’s misstatements, misleading statements, or breaches of the duty of loyalty (when based on fraud) would leave many injured parties without a means of recovery.”
The court affirmed the ruling of the Superior Court, which requires RSUI to pay the $10 million policy limit plus $2,321,096 in pre-judgment interest.
Photo courtesy of Dole Foods Co.
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