United States District Court, D. Delaware
THOMAS YERANSIAN, in Ms capacity as the representative of holders of certain Contingent Value rights under the Contingent Values Rights Agreement dated October 15, 2010, Plaintiff,
MARINE CORPORATION, a Virginia Corporation, Defendant.
Yeransian, in his capacity as the representative of holders
of certain contingent value rights under the Contingent Value
Rights Agreement, brought this suit against Markel
Corporation ("Markel") on September 15, 2016. (D.I.
1). Yeransian alleges that Markel breached the Contingent
Value Rights Agreement ("the CVR Agreement") by
failing to follow generally accepted accounting principles
("GAAP") and actuarial standard of practice
("ASOP") in its calculations of the Adjusted
Principal Amount. Id. The Complaint's eight
causes of action essentially arise out of Marke's alleged
failure to properly calculate the loss and expense reserves,
Markel's alleged misrepresentations or misstatements with
regard to calculation of those reserves, and Markel's
failure to provide the correct documentation for its
before the court is Markel's Motion to Stay Litigation
and Compel Arbitration. (D.I. 35). Markel moves the court to
stay the litigation, pending completion of the dispute
resolution procedures outline in Section 3.2(d) of the CVR.
(D.I. 36). For the reasons that follow, the court grants
current action arises out of Marke's 2009 acquisition of
Aspen Holdings, Inc., a workers' compensation insurance
underwriter. (D.I. l'¶5). In 2009, Aspen reported
$81.7 million in shareholder equity (book value).
Id. ¶ 6. Based on that book value, Markel
offered to buy Aspen for $183 million subject to due
diligence. Id. ¶ 7. After due diligence, Vice
Chairman of Markel's Board of Directors informed the CEO
of Aspen, Luke Yeransian, that Markel found Aspen's book
value to be overstated by $47.3 million as of December 31,
2009. Id. ¶ 8. Markel agreed to purchase Aspen
but, in order to account for the possibly overstated book
value, Markel would pay $135.7 million in cash at closing and
create a Contingent Value Rights Agreement. Id. The
CVR Agreement would pay $47.3 million in additional
consideration to Aspen's shareholders in eight years
(with a pre-payment option at year five) if Aspen's book
value as of December 31, 2009 turned out to be correct.
of its regular business practice, and important to the
company's book value, Aspen "established loss and
expense reserves to pay for claims arising from workers'
compensation policies." Id. ¶ 5.
Accordingly, the CVR Agreement was intended to capture
changes in Markel's book value-due in part to the
reserves-as it affected the compensation ultimately paid to
The CVR would be adjusted upward or downward dollar for
dollar following the acquisition based on future changes to:
(a) Aspen's outstanding loss and expense reserves
("Reserve Adjustment"), (b) the value of
Aspen's commission receivable ("Receivable
Adjustment") related to its Managing General Agency
Contracts, and (C) other Offsets, including premium audit and
any adjustments and/or extraordinary settlements of amounts
due to counter parties (reinsurance companies) that would
impact book value as stated on December 31, 2009.
Id. ¶ 9. If it turned out that Aspen's book
value was higher than the stated value of $81.7 at December
31, 2009, then Markel would pay the CVR Holders "the
corresponding amount dollar for dollar over the $47.3 million
initial CVR value." Id. ¶ 11.
calculate the value of the CVR, and, accordingly, the final
payment amount, Markel was to follow the procedures outlined
in Section 3.1 of the Agreement. Section 3.1 of the CVR
Agreement explains that any prepayment, under Section 3.5(a)
or Section 3.5(b), or set-off amounts, under Section 3.4,
will be deducted from the Initial Principal Amount. (D.I.
36-2 Section 3.1(a)). Further, the Reserve Adjustment is
added to the Receivable Adjustment to determine the Principal
Adjustment. Id. The Initial Principal Amount
adjusted by the Principal Amount then yields the value of the
Adjusted Principal Amount. Id. The Adjusted
Principal Amount, "together with interest accrued
thereon at the Interest Rate from the Closing Date to the
Payment Date, constitutes the Final Amount. Id.
was also required to abide by certain obligations under the
CVR Agreement: (1) "The amounts used to calculate the
'Adjusted Principal Amount' from December 31, 2014
through December 31, 2017 [had to] be adjusted . .:
consistent with Actuarial Principles, (D.I. .36-2 Section
3.1(c)); (2) The Holders had to receive annual accountings,
and supporting documentation, demonstrating in reasonable
detail how such amounts were determined, id. Section
3.2(a); and (3) the actuarial assumptions had to incorporate
a 50% confidence interval, and the reserves had to be
calculated in accordance with "commonly accepted
actuarial standards." Id. at Annex A.
Agreement predicted possible disagreements over calculation
and valuation of the CVR. In order to resolve such
disagreements, the CVR Agreement lays out a detailed process
in Section 3.2. According to Section 3.2(d), "[u]pon
delivery of a Disagreement Notice, the Holder Representative
and Parent [would] attempt in good faith to reach
agreement" over the calculation of the Adjusted
Principal Amount. In the event that they could not reach
agreement within fifteen days of service of the Disagreement
Notice, the Holder Representative could request that the
calculation of the Adjusted Principal Amount be referred to
an "Independent Actuary" and an "Independent
The Independent Claims Expert will independently review and
evaluate the Net Loss and Expense Reserves with respect to
the claims reported as of the Calculations Date on a
case-by-case basis and provide the results of his evaluation
to the Independent Actuary. The Independent Actuary will then
determine the Adjusted Principal Amount based, in the case of
Net Loss and Expense Reserves with respect to claims reported
as of the Calculation Date, solely on the results of the
Independent Claims Expert's review, and otherwise in
accordance with GAAP (in the case of the Receivable
Adjustment) or SAP (in the case of the Reserve Adjustment)
and the Actuarial Principles. The scope of the Independent
Actuary's and the Independent Claims Expert's review
will be limited to those matters over which there is
disagreement between the parties as reflected in the
Disagreement Notice. With respect to the review and
evaluation of any Adjustment Statement, the Independent
Actuary's determination of the Adjusted Principal Amount
set forth therein will be final and binding on the parties.
Id. Section (d).
current litigation is not the first time suit has been filed
over the CVR Agreement. In 2015, the CVR Holders questioned
the validity of the information in Markel's annual
Adjustment Statement dated December 31, 2014. (D.I. 1 ¶
21). The Holders engaged Huggins Actuarial Services, Inc. to
calculate any necessary adjustments and the value of the
CVRs. Id. ¶ 22. Markel, believing that the
Holders planned to request an independent valuation, filed
suit against the previous CVR Holder Representative.
Id. ¶ 24. Markel sought declaratory judgment
that the previous CVR Holder Representative "had made no
prepayment election and was therefore mot entitled to an
independent audit and a prepayment of the CVR value at year
five." Id. That prior suit ended in settlement
between the parties. The parties executed the 2015 Settlement
Agreement, which limited the prepayment rights of the CVR
Holders with regard to the Five-Year Adjustment Statement.
Id. ¶ 25. Inapplicable to the current motion
pending before the court, the CVR Holders contest the
validity and enforceability of that settlement agreement.
also filed suit in this court alleging that Yeransian
breached the 2015 Settlement Agreement, and requesting
specific performance of that agreement. Markel also seeks a
declaratory judgment that the Settlement Agreement is valid
and enforceable. On February 21, 2017, the court issued an
oral order consolidating that case with Yeransian's case.