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Insured’s Settlement of Claim Alleging Inadequate Consideration Involves Uninsurable Loss
Insurance Law Update
U.S. District Court for the District of Massachusetts
In Genzyme Corp. v. Federal Ins. Co., __F.Supp.2d__, 2009 WL 3101025 (D.Mass. Sept. 28, 2009), the U.S. District Court for the District of Massachusetts held that Genzyme’s directors and officers (D&O) insurer was not obligated to fund the settlement of a class action that alleged that Genzyme paid insufficient consideration to a group of shareholders when it eliminated a “tracking stock” of the company and compensated the shareholder group with general Genzyme stock.
From 1994 to 2003, the capital structure of Genzyme included a series of “tracking stocks” designed to track the performance of particular business divisions rather than Genzyme as a whole. On May 8, 2003, Genzyme announced the elimination of the tracking stock and advised that the holders of that stock would receive a certain number of general Genzyme shares. Shortly after the announcement, the affected stockholders filed suit against Genzyme and its directors and officers for allegedly scheming to depress the value of the “tracking” stock so that the exchange ratio would be favorable to the holders of general Genzyme stock. Genzyme settled the lawsuit by making a one-time payment of $64 million to the affected stockholders, and then filed suit against its D&O insurer demanding indemnification for the settlement payment.
The district court first found that the settlement payment was not an insurable “loss” under the D&O policy. Noting that a “‘loss’ within the meaning of an insurance contract does not include the restoration of an ill-gotten gain,” the court observed that the case presented a unique situation in that Genzyme, a corporate entity, did not receive ill-gotten gain from the share exchange. However, Genzyme’s actions benefited the holders of general stock at the expense of the holders of the “tracking” stock. Thus, the court concluded that the settlement payment was meant to recalibrate the inequitable share exchange, and that Genzyme should not be able to divide the benefits of equity ownership one way, redistribute those benefits, and then demand indemnification from its D&O insurer.
The court found unpersuasive Genzyme’s argument that the stock exchange did not implicate the “Bump-Up” exclusion in the policy (which precludes coverage for claims based on the payment of allegedly inadequate consideration for the purchase of securities) because Genzyme did not technically “purchase” anything. Instead, the court held that the exclusion, which was also a separate basis for the ruling, applied: “[I]n consideration for the [“tracking”] shareholders relinquishment of their shares, Genzyme issued them new shares in the general division. The share exchange was unambiguously a ‘purchase’ within the meaning of the word.”
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