Delaware Chancery Court Awards Advancement of Fees in Connection with Post-Merger Indemnification Claims
By: Scott E. Waxman and Sophia Lee Shin
In Joel Z. Hyatt and Albert A. Gore, Jr. v. Al Jazeera America Holdings II, LLC and Al Jazeera International (USA) Inc., the Delaware Court of Chancery reviewed a motion for summary judgment in connection with a dispute regarding the advancement of fees for the litigation of various post-merger indemnification claims. The Chancery Court held that the plaintiffs were entitled to advancement for certain claims, but not for others, depending on whether the underlying facts of each claim required the plaintiffs to defend their actions as former officers or directors.
Joel Z. Hyatt (“Hyatt”) is a former member and director of Current Media, LLC (“Current”) and its former CEO. Albert A. Gore, Jr. (“Gore”) is Current’s former executive chairman and a former member. In 2013, Current became a subsidiary of Al Jazeera International (USA) Inc. (“Al Jazeera”) pursuant to a merger (the “Merger”). In connection with the Merger, Hyatt and Gore resigned from their positions and Hyatt was appointed Members’ Representative. The merger agreement required that Al Jazeera indemnify and advance fees to Current’s former officers and directors to the same extent such persons were indemnified by Current’s Second Amended and Restated Operating Agreement for a period of six years following the Merger.
Al Jazeera subsequently served several claim certificates for indemnification on Hyatt, as Members’ Representative, alleging that Current had breached most-favored-nations (“MFN”) provisions in several of its distributor agreements, contrary to the representations in the merger agreement. In August 2014, Hyatt and Gore initiated an action (the “Underlying Action”) claiming that Al Jazeera’s claim certificates were improper. Al Jazeera subsequently filed counterclaims (the “Counterclaims”), claiming that Hyatt had breached the merger agreement by rejecting the claim certificates. In October 2015, Hyatt and Gore (the “Plaintiffs”) filed this action for advancement of the litigation costs for defending the Counterclaims, and for the related fees on fees with pre- and post-judgment interest. All parties moved for summary judgment on the issue of advancement.
Al Jazeera agreed in the merger agreement to advance fees to Current’s former officers and directors. Because the Counterclaims required Hyatt and Gore to defend their actions as former officers or directors, the Plaintiffs claimed that Al Jazeera was liable for the related fees. Al Jazeera, however, claimed that its Counterclaims were alleged against Hyatt only in his capacity as Members’ Representative, and thus, Hyatt was not entitled to advancement. Al Jazeera also claimed that Gore was a party to the Underlying Action solely in his capacity as a former member of Current, and thus similarly not entitled to advancement.
The Chancery Court first held that indemnification is distinct from advancement, and that advancement is not necessarily dependent on whether the party is ultimately entitled to indemnification. The Chancery Court also held that Hyatt’s role as Members’ Representative did not eliminate his role as former officer and director—the fact that Hyatt was sued in his capacity as Members’ Representative did not displace any rights he held as a former officer or director. The same logic was applied to Gore in his role as a former director.
Hyatt and Gore would be entitled to advancement to the extent they are former officers or directors who were threatened to be made defendants in a proceeding “by reason of the fact” that they were a director or officer of Current. Al Jazeera claimed that the Counterclaims involve Hyatt only in his role as Members’ Representative. Hyatt and Gore, however, stated that they still needed to defend their actions as former officers or directors, even if they might not be liable in their capacities as officers or directors in the Underlying Action.
Citing Rizk v. Tractmanager, Inc., the Chancery Court held that, because the resolution of the validity of the claim certificates in the Underlying Action requires Hyatt and Gore to defend their actions as former officers and directors, the Chancery Court needed to determine whether each of the seven counts in this action established sufficient nexus to Hyatt’s and Gore’s corporate powers, entitling the Plaintiffs to advancement.
In three counts, Al Jazeera sought validation of the claim certificates alleging that Current falsely represented that it was in compliance with certain MFN provisions in its distributor agreements. In particular, Al Jazeera claimed that Hyatt and Gore agreed to pay $10,000,000 to one company in order to obtain its consent to the change of control, in violation of certain MFN provisions in other distribution agreements. In another count, Al Jazeera sought validation of a claim certificate alleging that Al Jazeera was forced to make an unforeseen settlement payment to another company to settle a dispute between Current and that company that existed at the time of the Merger. The Chancery Court held that the facts of these claim certificates would likely require Hyatt and Gore to defend their actions as officers and directors in connection with these counts, and thus, they were entitled to advancement for these counts.
In another count, Al Jazeera sought validation of a claim certificate alleging that Current’s former members agreed in the merger agreement to indemnify Al Jazeera for 50% of the expenses it incurred to terminate a distribution agreement between Al Jazeera and a specific company. In another count, Al Jazeera sought validation of a claim certificate requesting reimbursement of defense costs that Al Jazeera allegedly paid on behalf of Hyatt, as Members’ Representative, in the defense of a third-party claim. The Chancery Court held that the facts underlying these count would not require Hyatt or Gore to defend their actions as former officers or directors, and, thus, they were not entitled to advancement for these counts.
Lastly, the final count sought various declarations requiring the former members of Current to indemnify Al Jazeera for the claim certificates discussed in counts discussed above. The Chancery Court held that advancement is available for this count only to the extent that the declarations pertained to counts for which advancement was otherwise permitted.
The Chancery Court also held that the Plaintiffs are entitled to fees on fees related to the claims for which they are entitled to advancement, and to pre- and post-judgment interest.
Hyatt v. Al Jazeera, C.A. No. 11465-VCG (Del. Ch. March 31, 2016)