Chancery Court Affirms Former Executive’s Right to Advancement in Connection with Federal Indictment

By Lisa Stark and Lauren Garraux

In a post-trial memorandum opinion, Chancellor Andre Bouchard determined that Donald L. Blankenship, the former CEO and Chairman of Massey Energy Company (“Massey”), now known as Alpha Appalachia Holdings, Inc. (“Alpha”), was entitled to advancement of unpaid legal expenses incurred in connection with his indictment following an April 2010 mine explosion in West Virginia. According to Chancellor Bouchard, Blankenship’s right to advancement stemmed both from Massey’s October 2010 Amended and Restated Certificate of Incorporation (the “Charter”) and an Agreement and Plan of Merger between Massey and Alpha, pursuant to which Alpha acquired Massey.

Blankenship served as Massey’s CEO and Chairman until his retirement in December 2010. During his tenure at Massey, in April 2010, an explosion occurred at a West Virginia coal mine operated by a Massey subsidiary. The explosion killed 29 miners and led to both civil proceedings and a federal criminal investigation into the incident launched by the United States Attorney’s Office for the Southern District of West Virginia. For several years after the explosion, Massey and Alpha, which acquired Massey in January 2011, honored Blankenship’s right to advancement of his legal expenses and paid such expenses incurred in connection with the civil proceedings and federal criminal investigation. In November 2014, Blankenship was indicted on charges arising from the explosion. Following the indictment, Alpha stopped paying Blankenship’s legal fees.

In this action, Blankenship sought advancement of unpaid legal expenses from Massey and Alpha, the majority of which were incurred following the indictment, under: (i) Massey’s Charter; (ii) the Merger Agreement; and (iii) an engagement letter between Blankenship and his counsel which Massey’s then-General Counsel also signed.

With respect to Massey’s Charter, Massey argued that Blankenship was not entitled to mandatory advancement rights as a former Massey officer because he breached an undertaking which he signed in April 2011 (the “Undertaking”). In relevant part, the Undertaking provided that Massey’s indemnification and advancement obligations to Blankenship were “contingent upon [certain] factual representations and undertakings,” including a representation that, in performing his duties as a director and officer of Massey, Blankenship “had no reasonable cause to believe that [his] conduct was ever unlawful.”

The Court rejected Massey’s reliance on the Undertaking and characterized its interpretation of the Undertaking as a license for it to deny Blankenship further advancement as unreasonable, contrary to principles of contract interpretation and unsupported by the albeit limited extrinsic evidence surrounding the drafting and execution of the Undertaking which reflected its aim to clarify, and not to change or modify, Blankenship’s existing advancement rights under the Charter.

Chancellor Bouchard also determined that Massey’s advancement obligations to Blankenship under the Charter survived Alpha’s acquisition of Massey under Section 5.05(b) of the Merger Agreement between those parties. Section 5.05(b) generally covers actions or proceedings in which an indemnified party, such as Blankenship, is made or threatened to be made a party “from and after the Effective Time” of June 1, 2011. In interpreting this provision, the Chancellor rejected, among other arguments advanced by Alpha, Alpha’s position that the November 2014 indictment should relate back to the U.S. Attorney’s criminal investigation for which Massey was providing advancement for Blankenship before the merger became effective. Instead, Chancellor Bouchard determined that the indictment plainly occurred after the Effective Time and, therefore, was within the ambit of Section 5.05(b).

Finally, Chancellor Bouchard concluded that Blankenship’s third alleged source of his advancement rights — namely, his engagement letter with his counsel, which was counter-signed by Massey’s then-General Counsel — did not provide a basis for advancement rights. Rather, in Chancellor Bouchard’s view, the engagement letter set forth nothing more than the agreed-upon invoice terms and payment schedule under which Blankenship’s counsel would bill Massey and Massey would pay.

Having affirmed Blankenship’s advancement rights under both the Charter and the Merger Agreement, which limited payment to expenses “reasonably incurred” and “reasonable attorneys’ fees and expenses,” respectively, Chancellor Bouchard determined that the expenses Blankenship already had occurred in connection with the indictment, but which Defendants had not paid, met the reasonableness standard. As a result, the Chancellor declined Defendants’ “invitation to belabor” the proceeding by challenging the form of the invoices from Blankenship’s counsel and requesting appointment of a special master to review and report on the reasonableness of the time sheets.

Finally, the Chancellor found that Blankenship was entitled to recover his fees incurred in litigating this action from Massey and Alpha under Massey’s Charter.

BlankenshipvAlphaAppalachia

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