4th Circuit Finds Nothing Ambiguous About Bump-Up Exclusion

By Jim Sams | May 10, 2023

Whether you call it an acquisition or a merger, the fact that Willis Group Holdings ended up controlling Towers Watson and shareholders filed a lawsuit alleging they were shortchanged triggered a “bump-up” exclusion in a directors and officers policy, a panel of the 4th Circuit Court of Appeals ruled Tuesday.

The appellate panel vacated a decision by a US District Court judge that found the exclusion contained in eight identical D&O insurance policies was ambiguous because it applied only to “acquisitions,” not mergers such as the deal that transformed Towers Watson into a wholly owned subsidiary of Willis.

The 4th Circuit said the trial court had found an ambiguity where none actually existed.

“Not further defined in the policy, the term ‘acquisition’ must be given its ordinary meaning, which is to gain ‘possession’ or ‘control’ of something,” the panel’s opinion says. “Thus, the bump-up exclusion’s ‘acquisition’ requirement is satisfied where another entity secures ‘possession’ or ‘control’ of all or substantially all the ownership interest in or assets of Towers Watson.”

In 2015, Willis took control over Towers Watson in a transaction known as a reverse triangular merger. Citadel Merger Sub, a wholly owned Willis subsidiary, merged into Towers Watson and disappeared. In a separate transaction, Towers Watson merged into a Willis subsidiary, WTW Delaware Holdings, and ceased to exist.

Towers Watson delisted its shares from the Nasdaq exchange. Shareholders were given 2.649 shares of Willis for each canceled Towers Watson share. That gave the former Towers Watson shareholders control of 49.9% ownership of Willis.

Over the next several years, former Towers Watson shareholders filed separate class action lawsuits against Willis. They alleged that Tower Watson’s former chairman and chief executive officer, Thomas Haley, had a conflict of interest because he was paid $165 million after the deal closed. The suit, filed in the US District Court for Eastern Virginia, alleged the lucrative compensation induced Haley to a accept a low valuation for the company.

Willis settled two shareholder lawsuits for $90 million and then sought compensation from its D&O insurers. They denied the claim, citing the bump-up exclusion, which voided coverage for any disputes where shareholders allege they received inadequate compensation from an acquisition.

Willis filed a motion for summary judgment, asking the District Court to decree that the bump-up exclusion did not apply to the shareholder lawsuit because there was no acquisition. Senior District Court Judge Anthony John Trenga agreed and granted summary judgment on that point. The insurers appealed to the 4th Circuit.

The appellate panel said since the term “acquisition” is not defined by the policy, the term must be afforded its plain and ordinary meaning. Acquisition means to take control or possession of something.

“That is precisely what happened here as a result of the Willis-Towers Watson reverse triangular merger: Willis gained total possession and control of all ownership interest in Towers Watson, and with it all of Towers Watson’s assets,” the panel’s opinion says.

That does not end the dispute. The panel said Towers Watson argues two other points which make the bump-up exclusion in applicable but the District Court did not consider those points.

As a result, the panel vacated the District Court’s decision but remanded the case with a direction to resolve the other issues raised by Towers Watson.

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