Since the wave of corporate takeovers and resulting litigation in the early 1980s, some D&O policies contain exclusions that preclude coverage for claims arising out of the threat of hostile takeover or the defensive tactics employed to resist takeover. Claims alleging failure of the board to oppose an attempted or successful takeover would appear outside the scope of some policy exclusions, but may be excluded elsewhere in the policy or by endorsement. A typical hostile-takeover exclusion is shown below:

The Insurer shall not be liable to make any payment for Loss in connection with any Claim made against the Directors or Officers:

A. arising out of or in any way involving actual or alleged: (1) attempts, whether successful or unsuccessful, by any person or entity, to acquire securities of the Company, in opposition to the Board of Directors of the Company, or (2) efforts, whether successful or unsuccessful, by the Company or any of its Directors or Officers to resist such attempts;

                                         Great American Insurance Company, D100A (2/90)

Hostile-takeover exclusions typically contain broad language intended to exclude claims resulting from a variety of common defenses employed to thwart or inhibit takeover. These include but are not limited to the following.

Poison Pill. Defenses that involve the issuance of special classes of stock, which are issued upon the merger, combination or acquisition of the corporation and must be purchased by the acquiring entity. The strategy is to dramatically increase the acquisition price by increasing the outstanding shares.

Lock ups. The grant or sale of an option to purchase valuable assets of the corporation to a preferred bidder or white knight. A variation of the lock-up strategy is to sell off key assets, or crown jewels, of the corporation to make it less attractive to the raider.

Golden parachutes. Guaranteed compensation packages provided to directors who leave the corporation after a takeover. These compensation packages can substantially increase the raider's cost of acquisition.

Shark repellent. Amendments to the corporate bylaws that make it difficult for the raiding entity to gain control.

Greenmail. A common tactic involving the repurchase of a corporation's own stock from the raiding entity at an above-market-value price.

Pac-man. Defenses that involve the attempted purchase of the raiding company by the target company prior to the raiding company's gaining a controlling interest.

None of the above tactics is sure to prevent a takeover bid; rather, the tactics often are used to enhance the corporation's negotiating position and possibly attract additional and more favorable bidders. A major problem with hostile-takeover exclusions is that, in many instances, while the individual insureds will have acted in the best interests of the corporation and undertaken defenses as a lawful exercise of their business judgment, they still may be subject to second-guessing by disgruntled employees, shareholders, creditors or even the person or entity attempting the takeover. What is particularly troublesome is that shareholders more than ever are questioning the often-exotic tactics employed by corporate management to thwart takeover actions. One reason for this scrutiny by shareholders is that the costs of tendering such takeover defenses can be astronomical, often involving an army of accountants, lawyers, bankers and consultants.

A few older policies that contain a hostile-takeover exclusion within the basic policy form make an exception to the exclusion when independent professional opinion is obtained as to the validity of undertaking a specific defensive course of action. The following example provides that the exclusion does not apply when an affirmative opinion of the target firm's proposed activities is given by both outside counsel and an investment banking firm.

arising from, attributable to or involving attempts, whether alleged or actual, successful or unsuccessful, by persons or entities to acquire securities of the Company Insured against the opposition of the board of directors of the Company Insured or to any claims arising from, attributable to or involving efforts, whether alleged or actual, successful or unsuccessful, by the Company Insured and/or the Individual Insureds to resist such attempts, except when before taking any such resistive action, the Company Insured or the board of directors has obtained a written opinion: (1) from independent legal counsel that such resistive action is a lawful exercise of the board of director's (sic) business judgment and (2) from an independent investment banking firm that the price of such acquisition of securities is inadequate, and that any financial transaction approved by the board of directors which is resistive of such acquisition is fair to the Company Insured and its shareholders;

                                                                          Evanston EIC 2002-1 (4/96)

Greenmail

A form of hostile-takeover exclusion that is limited to greenmail also may be found in some policy forms. The greenmail exclusion is similar to the more encompassing hostile-takeover exclusion, but is limited to claims based on the repurchase of stock from the raiding entity at a premium over the current market price. Greenmail can be one of the most costly of anti-takeover tactics. The target corporation may deplete cash reserves or take on large debt burdens in fending off the suitor. Because the greenmail defense can leave the target corporation in shambles financially, shareholder suits are frequent.

Due to an increase in use of the greenmail defense, the SEC's involvement in upholding shareholders' rights, and a general increased awareness by shareholders, specific greenmail exclusions like the following now appear in some D&O policy forms.