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For some time now, merger-objection and acquisition-objection litigation against buyers of companies have been on the rise. In years past, these cases often settled for not much more than additional-disclosure agreements and reimbursement of plaintiffs’ attorney fees. Some settlements, however, have involved substantial financial payments to the acquisition- and/or merger-objecting plaintiffs to resolve their inadequate-consideration, also known as “bump up,” claims. Some of these settlements were paid by the settling defendants’ directors and officers liability insurers.

Enter the “bump-up” exclusion. The historic purpose of the bump-up exclusion was to prevent buyer-side insureds from intentionally negotiating a below-market acquisition price, and then seeking insurance proceeds to fill the acquisition-price gap to settle the inevitable shareholder objection—essentially achieving a “fair-market value” transaction, but with insurer funds.

Typical of Directors and Officers (D&O) policy provisions, the language insurers use to impose bump-up exclusions varies considerably from insurer to insurer. One example reads as follows:

In the event of a Claim alleging that the price or consideration paid or proposed to be paid for the acquisition or completion of the acquisition of all or substantially all the ownership interest in or assets of an entity is inadequate, Loss with respect to such Claim shall not include any amount of any judgment or settlement representing the amount by which such price or consideration is effectively increased; provided, however, that this paragraph shall not apply to Defense Costs or to any Non-Indemnifiable Loss in connection therewith.

Recent Bump-Up Cases

Northrop Grumman Innovation Systems Inc. v. Zurich America Insurance Co., C.A. No. N18C-09-210 (Del. Super. Ct. Feb. 2, 2021)

In Northrop Grumman, the Chancery Court of Delaware considered whether, under Delaware law, a bump-up exclusion barred coverage for the settlement of a class action following a reverse triangular merger between Alliant Techsystems Inc. and Orbital Sciences Corp., which resulted in the creation of a new entity.

Construing the bump-up provision, which the court deemed an exclusion, narrowly and strictly under Delaware law, the court concluded that it applied to “a lawsuit (‘Claim’) that ‘alleg[es]’ only the ‘consideration’ exchanged—nothing else—as part of only one specific control transaction (an ‘acquisition’ of ‘all or substantially all [the] ownership interest[’] or ‘assets’ of an ‘entity’) was ‘inadequate.’” (Emphasis added). The court held the exclusion was inapplicable to the merger because the lawsuit involved more than just inadequate consideration.

Towers Watson & Co. n/k/a/ WTW Delaware Holdings LLC v. National Union Fire Insurance Co. of Pittsburgh, PA, et al., No.21-2396 4th Cir. May 9, 2023

Towers Watson and Willis agreed to merge in June 2015. Shareholders filed suit in Virginia and Delaware objecting to the merger. These suits reportedly settled for a total of $90 million.

The insurers refused to fund the settlements based on the bump-up exclusion, and Willis filed suit. The “dispositive coverage issue” for the court was whether the bump-up exclusion unambiguously applied to the merger settlements. The Fourth Circuit Court of Appeals reversed the district court’s ruling on the interpretation of the bump-up exclusion and remanded the case for determination of two issues: whether the insured was “an entity” under the bump-up exclusion, and whether the underlying settlement represented an increase in consideration for Towers Watson’s shares.

Ceradyne, Inc. v. RLI Ins. Co., No. 2:21-cv-6373 (JVS/KES) (C.D. Ca Oct. 31, 2022), 2022 WL 16735360

Ceradyne shareholders reached an $11.3 million settlement in litigation arising from a proposed merger of Ceradyne and 3M, in which 3M would purchase all outstanding Ceradyne shares. Following the settlement, Ceradyne sought payment from its D&O insurers for coverage of that amount. Insurers denied coverage, citing, in part, the policies’ bump-up exclusion.

Ceradyne argued that because it was the acquired entity and not the acquiring entity, its Policy’s bump-up exclusion was inapplicable. The court, however, interpreted the bump-up exclusion’s reference to “acquisitions” as not limited to those transactions in which the insured was the acquiring party. Thus, the exclusion barred Ceradyne’s claim for damages.


These recent, seemingly inconsistent, rulings on the interpretation of “bump-up” exclusions leave companies facing shareholder derivative suits more likely to confront pushback from their D&O insurers.

Nuanced differences in D&O-policy language can make or break a coverage claim. Companies considering M&A transactions should pay close attention to the precise language in their D&O policies, and in particular, to any bump-up exclusion in those policies.

This article is provided for informational purposes only—it does not constitute legal advice and does not create an attorney-client relationship between the firm and the reader. Readers should consult legal counsel before taking action relating to the subject matter of this article.

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