Exchange Offer Constitutes “an Offer to . . . Sell any Securities” of Insured Triggering Coverage for “Securities Claims” 

The U.S. District Court for the District of New Jersey, applying New Jersey law, has held that a lawsuit brought by a target company’s shareholders against an insured after a failed acquisition that involved a stock exchange offer by the insured constitutes “an offer to . . . sell any securities” of the insured, satisfying the definition of “Securities Claim” required to trigger the company’s D&O coverage. Valeant Pharm. Int’l, Inc. v. AIG Ins. Co. of Canada, 2022 WL 4082415 (D.N.J. Sept. 6, 2022).

The insured, a pharmaceutical company, attempted to acquire another pharmaceutical company (the target). As part of the attempt, the insured made a tender offer to the target’s shareholders including a combination of cash and the insured’s stock in exchange for the target’s stock (the exchange offer). Prior to making the exchange offer, however, the insured contracted with a third party to acquire a stake in the target and vote in favor of acquisition in exchange for, among other things, advance notice of the acquisition, allowing the third party to obtain target stock before the exchange offer. Ultimately, the acquisition failed. A group of the target’s shareholders sued the insured and the third-party, including under the Williams Act amendments to the 1934 Securities Exchange Act, alleging that, if the shareholders had known the exchange offer was forthcoming, they would not have sold their shares at allegedly artificially low prices. 

The insured sought coverage for the lawsuit under its directors and officers insurance program, which provided coverage for a “Securities Claim,” defined in relevant part as a “Claim” “alleging a violation of any law, rule or regulation, whether statutory or common law (including but not limited to the purchase or sale or offer or solicitation of an offer to purchase or sell securities), which is: brought by any person or entity alleging, arising out of, based upon or attributable to the purchase or sale or offer or solicitation of an offer to purchase or sell any securities of an Organization[.]” The insurers denied coverage for the lawsuit on the grounds that the lawsuit did not constitute a Securities Claim. The insured sued the insurers.  

The court granted the insured judgment on the pleadings, holding that the underlying lawsuit constitutes a Securities Claim. In particular, the court concluded that the underlying lawsuit “alleg[es], aris[es] out of, [is] based upon or [is] attributable to . . .  an offer to sell [the insured’s] securities.” The court reasoned that “the violations of law arise from [the insured’s] securities” “because the insurer could reasonably contemplate that [the insured] would use its shares in an exchange offer, and the Williams Act is a natural and probable exchange-offer violation.” With respect to the insurers’ argument that “the securities component of [the insured’s] tender offer is irrelevant to the [target] shareholder’s theory of liability,” the court rejected the notion that “a theory-of-liability test supplants the broad standard New Jersey courts employ for coverage provisions and the terms ‘allege,’ ‘arise out of,’ ‘based upon,’ and ‘attributable to.’” Further, the court concluded that the underlying lawsuit involves “an offer to sell [insured] securities.” The court also rejected the argument that the “exchange offer was really an offer to purchase the [target] securities, not one to sell [the insured’s] shares.” The court reasoned that the exchange offer “involved two components, first the sale of [the insured’s] shares to [target] shareholders and second the purchase of [target] shares,” and the insured “acted thus as both purchaser and seller.”