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Inadequate Consideration Exclusion

Inadequate Consideration Exclusion

Definition

Inadequate Consideration Exclusion — an exclusion found within some directors and officers (D&O) liability policies, especially those written to cover publicly held companies.

Following the purchase of one corporation by another, shareholders of the acquired organization occasionally bring lawsuits alleging that the purchase price paid by the acquirer—and thus the price received by the acquiree's shareholders—was too low. In other words, claims alleging inadequate consideration are based on perception of the stockholders of the acquired company that they did not receive fair compensation for their shares. Therefore, lawsuits seek compensation that represents the difference between what the acquiring company paid per share of stock and what the shareholders of the acquired company believe their shares were actually worth.

The inadequate consideration exclusion is also known as the "bump up" exclusion, implying that the agreed-upon acquisition price should be "bumped up" to a figure considered more fair by the shareholders of the acquired company.

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