By Al Haverkamp of Lucas & Haverkamp
1Question: Pan Pacific and Western negotiated a merger whereby all of Western’s shares were acquired by Pan Pacific. One of Western’s shareholders brought a class action against Western’s officers and directors for breach of fiduciary duty and other causes of action. The lawsuit alleged Western’s officers and directors failed to negotiate the best possible price for Western’s shares and engaged in related transactions with Pan Pacific which only benefitted the officers and directors. The gravamen of the lawsuit was a shareholder derivative claim – that if the shareholders prevailed, money would be returned to Western, not to the individual shareholders. Western’s officers and directors were insured by Twin City under a Directors and Officers Liability and Company Indemnification Policy. Twin City denied coverage, asserting the only remedy sought in the lawsuit was restitution (the return to Western of the devalued stock) and restitution is not insurable under Ca. law. The shareholder case settled for $975,000. Is there coverage?
Answer: Yes. The court found the shareholder derivative claims only sought restitution – the devaluation of Western’s stock – and were not covered. However, the court noted the shareholder lawsuit also included direct shareholder claims against the officers and directors for the “value of information” allegedly withheld from the shareholders. The court found it conceivable that under this “value of information” theory there could be direct compensatory liability by the officers and directors to the shareholders. Such liability would not be “restitution” and would be covered. The court found there were issues as to how much of the settlement was paid for potential liability under the “value of information” theory. See Martin Marietta v INA (1995) 40 Cal. App. 4th 1113.