The Delaware Supreme Court may have singled-handedly done what the market has been trying to do for years: Make Directors & Officers liability insurance more affordable.
In early May, the Delaware Supreme Court essentially instructed trial courts to throw out future lawsuits challenging corporate acquisitions or mergers that have been properly approved by shareholders. The implications in the Zales case are far-reaching and may discourage M&A litigation. The ruling should also continue to soften D&O rates for publicly traded companies.
A High Bar
The Delaware court’s decision spelled out the future hurdles necessary to oppose a merger or acquisition. If investors are fully informed and have the authority to turn down a takeover, a merger or acquisition cannot be challenged. That’s true even if there were significant mistakes made by directors in the process, so long as a majority of shares owned by disinterested stockholders voted in favor of the deal.
As The Wall Street Journal put it, “If investors are fully informed and have the power to turn down a takeover deal, it doesn’t matter how many or how big are any mistakes directors make in the process — as long as a majority of shares owned by disinterested stockholders are voted “yes.”
The other key impact of this case, and a succession of other cases, is that the bar has been raised very high for M&A litigation for corporations and their advisers. The cases encourage more disclosure about every possible flaw in the transaction process, including failure to recognize potential conflicts of interest – a common shareholder litigation. If disclosures are broad, the shareholders are deemed fully informed. Greater disclosure is expected to greatly reduce future M&A litigation and pressure further reductions of D&O costs for public companies.
What To Do
The bottom line is that the ruling may further reduce the cost of publicly traded company D&O premiums. The decreases can be more consistent and significant on excess layers.
Looking to make sure your company has the right coverage at the right price? Let Marsh & McLennan Agency (MMA) do an assessment of your D&O needs and coverage. Please click here to talk to a MMA D&O specialist.