A judicial panel of the Fourth Circuit Court of Appeals has ruled insurance broker Towers Watson may not be entitled to $80 million in insurance to cover settlements of shareholder lawsuits related to the merger between Towers Watson and Willis in 2015.

In its ruling, the appeals court in Richmond reversed a coverage victory won by Towers Watson in federal district court in Alexandria in 2021. However, this may not be the final word in the dispute as Towers Watson has other avenues it can pursue.

The coverage dispute has to do with what is known as a “bump up” exclusion in the directors and officers (D&O) liability policies issued to Towers Watson in 2015. A bump-up exclusion generally bars coverage for losses stemming from judgments or settlements in connection with claims against the insured seeking an increase, or “bump up,” in the consideration paid in an acquisition.

Towers Watson shareholders filed several lawsuits in Virginia and Delaware against Towers Watson’s chairman and CEO and others, alleging they received below-market consideration for their shares in the merger. The Virginia litigation settled for $75 million; the Delaware settled for $15 million.

Towers Watson sought indemnity coverage for the settlements under its D&O policies including the primary policy from National Union Fire Insurance. The insurers refused the indemnity request, citing the bump-up exclusion in the policies. Towers Watson argued that the exclusion did not apply.

In relevant part, the bump-up exclusion provides:

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.

Eastern Virginia U.S. District Judge Anthony J. Trenga found for Towers Watson that the bump-up exclusion did not apply to bar coverage because the deal between Willis and Towers Watson was not a typical acquisition where one entity gains control over another. Trenga noted that Towers Watson canceled its common stock and issued new shares to Willis when it merged into a Willis subsidiary and disappeared.

“Under these circumstances, the merger was hardly comparable to the straightforward takeover of one company by another suggested by the bump-up exclusion and therefore is reasonably viewed as something other than ‘the acquisition’ referenced in the bump-up exclusion,” Trenga wrote.

But in a 3-0 opinion written by Judge G. Steven Agee, the appeals court vacated that district court ruling, finding that the lower court’s reading of the exclusion was “unduly narrow” in citing “ambiguity where none exists and ascribing specialized meanings to policy terms that the parties did not reasonably intend.”

The new ruling is itself narrow in its scope and does not totally resolve the question of whether the bump-up exclusion bars indemnity coverage to Towers Watson for the underlying settlements. That’s because Willis raised two other reasons it believes the bump-up exclusion should not apply: that Towers Watson doesn’t constitute “an entity” and that the underlying settlements don’t represent an effective increase in consideration for the original Towers Watson shares. The appeals court said the district court should address these other issues if Willis cares to pursue them.

Reverse Triangular Merger

The appeals court revisited the history of the marriage of Willis and Towers Watson to demonstrate that the exclusion applies at least as far as the acquisition question is concerned. In 2015, Towers Watson and Ireland-based Willis Group Holdings executed a merger agreement under Delaware law. That agreement involved a “reverse triangular merger” in which a newly created Delaware corporation and wholly owned subsidiary of Willis — Citadel Merger Sub Inc. — merged into Towers Watson and disappeared, leaving Towers Watson as the surviving entity. Immediately thereafter, all Towers Watson shares were canceled and delisted from the NASDAQ. In exchange, Towers Watson shareholders received the right to 2.649 shares of Willis stock for each canceled Towers Watson share. As a result of this conversion rate, the now-former Towers Watson shareholders collectively acquired 49.9 percent ownership of Willis. The surviving Towers Watson entity then issued newly created shares to Willis, giving Willis ownership of “the only outstanding shares” of Towers Watson stock. In the end, therefore, the implemented merger agreement resulted in Towers Watson, with all its pre-merger assets, becoming a wholly owned subsidiary of Willis.

The Willis-Towers Watson reverse triangular merger is not the only merger relevant to this appeal. There was also a subsequent, legally distinct merger involving Towers Watson merging into another wholly owned subsidiary of Willis, WTW Delaware Holdings LLC. As a result of that merger, Towers Watson ceased to exist.

Former Towers Watson shareholders filed separate class actions against various parties, including former chairman and CEO John Haley. These actions stemmed from allegations that Haley negotiated the merger agreement under an undisclosed conflict of interest: Haley would receive $165 million if the deal closed. The shareholders maintained that because of this alleged conflict, Haley purportedly agreed to a below-market valuation of Towers Watson shares to ensure the merger’s success.

In criticizing the district court’s reading, the appeals court noted that neither the bump-up exclusion nor the policy stipulates, or even hints, that the term “acquisition” was intended to refer only to a particular form of acquisition, such as a takeover. “We think it clear that an ordinary person would understand that, through this reverse triangular merger, Willis obtained “possession” or “control” of—i.e., acquired—not just all the equity ownership interest in Towers Watson but also all of Towers Watson’s assets,” the appeals court stated.

The appeals court also disagreed with the district judge that the initial reverse triangular merger involving Towers Watson and Citadel was merely a “short-lived transitional event” with no legal significance. “To the contrary, that legally distinct merger—and the sole merger contemplated by the merger agreement—carried with it distinct legal consequences. Not only was this initial merger the focus of the underlying shareholder litigation, but it was also the very transaction that resulted in Towers Watson becoming a wholly owned subsidiary of Willis, giving Willis total control of Towers Watson and its assets,” Judge Agee wrote.

Also, the appeals court said it did not matter that Willis never actually “acquired” any of the stock of the former Towers Watson shareholders” but instead received newly created shares. “The bump-up exclusion is not triggered by the acquisition of any particular shares; it is triggered by the acquisition of ‘all or substantially all the ownership interest in or assets of an entity.’ Thus, what matters is whether Willis obtained possession or control of all or substantially all of Towers Watson’s equity or assets. And as detailed above, that is just what happened here,” the court declared.

Willis and Towers Watson completed their merger on January 4, 2016, and shares of Willis and Towers Watson ceased trading at the close of the New York Stock Exchange and NASDAQ Stock Market, respectively, that day. Shares of Willis Towers Watson now trade on the NASDAQ under the symbol WLTW.