Topic: Advancement

Words Matter: Chancery Court Holds that Indemnification Provision in Equity Purchase Agreement Does Not Cover Advancement of Expenses for Officer Conduct Unauthorized by the Board

By: Annette Becker and Adrienne Wimberly

In Computer Science Corporation v. Eric Pulier, et al., C.A. No. 11011-CB (Del. Ch. June 27, 2019), the Delaware Court of Chancery denied Plaintiff Computer Sciences Corporation’s (“CSC”) motion for partial summary judgement seeking to recover a portion of funds advanced to a former officer of ServiceMesh, Inc. (an entity CSC had acquired) for legal expenses incurred in defending a separate action. The Court held that based on its interpretation of the plain language of the indemnification provision in the relevant acquisition agreement that the indemnification provision was not broad enough to encompass the advancement of legal expenses in question.

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CHANCERY COURT FINDS THAT ALLEGATIONS RELATED TO POST-SEPARATION USE OF CONFIDENTIAL INFORMATION LEARNED PRE-SEPARATION WARRANT ADVANCEMENT

By: Scott Waxman and Calvin Kennedy

In Ephrat v. medCPU, Inc., C.A. No. 2018-0852-MTZ (Del. Ch. June 26, 2019), the Court of Chancery found that conduct occurring after Eyal Ephrat and Sonia Ben-Yehuda (together, “Petitioners”) left their positions warrants advancement provided that such conduct was related to Petitioners’ use of confidential information learned in an official capacity with medCPU, Inc. (“medCPU” or the “Company”). However, the Court held that allegations related to Petitioners’ breach of personal contractual obligations do not warrant advancement. Lastly, the Court held that Petitioners did not release their advancement rights by releasing all claims related to their “employment” with the Company.

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COURT OF CHANCERY HOLDS THAT MEMBER OF LIMITED LIABILITY COMPANY IS ENTITLED TO ADVANCEMENT WHILE DEFENDING A LAWSUIT IN ITS “OFFICIAL CAPACITY”

By Scott E. Waxman and Frank J. Mazzucco

In Freeman Family LLC v. Park Avenue Landing LLC, C.A. No. 2018-0683-TMR (Del. Ch. April 30, 2019), the Delaware Court of Chancery (the “Court”) held that a member of a limited liability company, in defending a lawsuit in its “official capacity” brought by the company’s managing member, was entitled to advancement of litigation expenses under the company’s operating agreement.

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Court of Chancery Holds That Plaintiff Failed to Meet Burden of Proof With Respect to Mistake-Based Reformation Claim

By: Scott Waxman and Tami Mack

In Richard B. Gamberg 2007 Family Trust v. United Restaurant Group, L.P., C.A. No. 10994-VCMR (Del. Ch. January 26, 2018), the Court of Chancery held that limited partner, Richard B. Gamberg 2007 Family Trust (the “Plaintiff”), failed to meet its burden of proof with respect to various claims against United Restaurant Group L.P. (the “Partnership”), Atlantic Coast Dining, Inc. (the “General Partner”), and the directors/shareholders of the General Partner (the “Shareholder Defendants”; together with the Partnership and the General Partner, the “Defendants”), which included a mistake-based reformation claim, among other breach of contract and breach of fiduciary duty claims.

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Court of Chancery Clarifies Method of Determining Specific Advancements

By Scott Waxman, Hilda Li, and B. Ashby Hardesty, Jr.

In this case, Vice Chancellor Laster issued a memorandum opinion in Edward M. Weil, et al v. Vereit Operating Partnership, L.P., C.A. No. 2017-0613-JTL, granting partial summary judgment in favor of individual plaintiffs, who served as senior officers and members of the board of directors of Vereit, Inc, (“Vereit”) the sole general partner of Vereit Operating Partnership, L.P. (the “Partnership”). Read More

Chancery Court Preserves Advancement for Corporate Officers Despite Exclusive Remedies and Seller Release Provisions in Stock Purchase Agreement

By Whitney Smith and Dean Brazier

In Mark S. Davis, et al. v. EMSI Holding Company, C.A. No. 12854-VCS (Del. Ch. May 3, 2017) the Delaware Chancery Court granted a motion for summary judgment brought by former officers of the defendant (“EMSI”) seeking advancement of legal fees for their defense in a related action, EMSI Acquisition, Inc. v. Contrarian Funds, LLC, et al., C.A. No. 12648-VCS (Del. Ch. May 3, 2017).  In granting the motion, the Court considered whether the plaintiffs had waived or released their right to advancement in the exclusive remedies provision or the seller release provision of the Stock Purchase Agreement (“SPA”) entered into in connection with the sale of EMSI.  The Court concluded that the SPA provisions did not waive or release the officers’ right to advancement of defense costs under EMSI’s bylaws and a sufficient nexus existed between the plaintiffs’ role as former officers and the claims in EMSI Acquisition requiring their defense.

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Chancery Court Confirms that Broad Arbitration Clauses Cover Questions of Substantive Arbitrability

By Scott Waxman and Will Smith

In Bennett J. Glazer, et al. v. Alliance Beverage Distributing Co., LLC, Civil Action No. 12647-VCMR (Del. Ch. Ct. March 2, 2017), the Delaware Court of Chancery granted the defendant’s motion to stay, holding that the Court lacks subject matter jurisdiction to decide the question of substantive arbitrability when the disputing parties are bound by an LLC agreement containing a broad arbitration clause.

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Chancery Court Enforces LLC Agreement’s Forum Selection Clause in Fee Advancement Claim

By: Scott Waxman and Mark Hammes

In Merinoff v. Empire Merchants, C.A. No. 12920-VCS (Del. Ch. Feb. 2, 2017), the Court of Chancery held that a forum selection clause in the LLC agreement of Empire Merchants, LLC (“Empire”) precluded an action by the managers and officers of Empire to obtain advancement of legal fees from being brought in the Delaware Court of Chancery.

Plaintiff officers and managers of Empire were defendants in a separate action brought by Empire in New York alleging that they carried out a massive and long running bootlegging scheme to illegally divert wine and spirits from Maryland into New York. Plaintiffs filed a claim in the Delaware Court of Chancery asserting that Empire’s LLC Agreement entitled them to advancement of legal fees that they would incur in defending that action. Empire asserted that its LLC agreement required such claims to be brought in New York and moved to dismiss under Court of Chancery Rule 12(b)(3) for improper venue.

The Court first recited the plain language of Empire’s LLC agreement, which provided that “any suit, action, or other legal proceeding arising out of this Agreement shall be brought in the United States District Court for the Southern District of New York or in any courts of the state of New York sitting in the Borough of Manhattan….” It further included a carve-out stating that “[n]otwithstanding the foregoing, any legal proceeding arising out of this Agreement which, under [Delaware’s Limited Liability Company] Act or, to the extent made applicable to the Company pursuant to this Agreement, the DGCL, is required to be brought in the Delaware Court of Chancery may only be brought in the Delaware Court of Chancery….”

The Court then explained that the Delaware Limited Liability Company Act does not contain any provisions regarding venue for claims relating to advancement of fees, but the DGCL, in § 145, states that the Delaware Court of Chancery shall have “exclusive jurisdiction” to hear such claims with respect to corporations. Plaintiffs argued that since the Empire LLC agreement incorporated certain terms from the DGCL, the carve-out in the Empire LLC agreement applied and they were required to bring this action in Delaware.

The Court rejected plaintiff’s arguments for two reasons. First, the portions of the DGCL incorporated into Empire’s LLC agreement related only to the standards for duties owed by managers and officers to Empire, not to advancement of fees. Second, even if the DGCL were applicable to plaintiff’s advancement claims, the statutory grant of “exclusive jurisdiction” to the Delaware Court of Chancery merely allocates jurisdiction among the Delaware courts, it does not constitute a “claim against the world that no court outside of Delaware can exercise jurisdiction….” Because this action therefore could have been brought elsewhere, it did not fall into the carve-out, which only captures actions “required” to be brought in Delaware. Thus the Court granted Empire’s motion to dismiss for improper venue.

Merinoff v. Empire Merchants C.A. No. 12920-VCS (Del. Ch. Ct. February 2, 2017)

Delaware Chancery Court Refers Issues of Arbitrability to Arbitrator in Officer Indemnification and Advancement Dispute

By: Shoshannah Katz and James Parks

In Meyers, et al. v. Quiz-Dia LLC, et al., C.A. No. 9878-VCL (Del. Ch. Ct. December 2, 2016), the Chancery Court referred the issue of arbitrability with respect to certain indemnification claims made by former officers of the Quiznos family of companies pursuant to their employment agreements to arbitration and stayed the proceedings as to those claims, while refusing to grant a stay of the proceedings with respect to separate claims for indemnification and advancement arising under a range of other agreements.

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Advance the Rupees, Please: Sutherland Global Holdings Must Advance Former-Director’s Legal Fees Related to Failed Land Deal in India

By: Joanna Diakos Kordalis and Jonathan Miner

In Narayanan v. Sutherland Global Holdings C.A. No. 11757-VCMR (Del. Ch. July 5, 2016), Vice Chancellor Montgomery-Reeves of the Delaware Chancery Court held, in a post-trial opinion, that the bylaws of Sutherland Global Holdings, Inc. (“Sutherland”) and an indemnification agreement between Sutherland and Plaintiff Muthu Narayanan (“Plaintiff”) are disjunctive and must be read separately, allowing Plaintiff to prevail on his claim for advancement of legal fees and expenses.

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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.

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CHANCERY COURT GRANTS SUMMARY JUDGMENT FOR ADVANCEMENTS OF FEES AND EXPENSES

By Eric Feldman and Michael Bill

On a motion for summary judgment in Marino v. Patriot Rail, the Delaware Court of Chancery confirmed, under Section 145 of the Delaware General Corporation Law (the “DGCL), that the advancement rights of officers and directors of a Delaware corporation, acting in their capacity as such, (i) continue after they leave office with respect to actions taken while in office, (ii) cannot be amended or eliminated retroactively unless the source of such rights provides otherwise, and (iii) do not apply to actions taken after an officer or director leaves office.

The case involves an underlying action that took place in a California court between Patriot Rail Company LLC (the “Company”) and Sierra Railroad Company (“Sierra”) which ended in favor of Sierra. Sierra moved to amend the judgment to add, among others, Gary Marino, the former Chairman, President and CEO of the Company, as a judgment debtor (the “Post-Judgment Motion”).  The Company existed as a Delaware corporation until May 1, 2013, when it converted to a Delaware limited liability company.  Prior to the time of such conversion, on June 18, 2012, the Company, which was partially owned indirectly by Marino, had been sold to a third party and Marino resigned from all of his positions with the Company.  Marino asked the Company to advance the fees and expenses that he would incur to oppose Sierra’s Post-Judgment Motion, but the Company denied the request. Marino subsequently commenced this action seeking the advancements of attorneys’ fees and expenses; the Company answered, and the parties cross-moved for summary judgment.  As the Company was a Delaware corporation during the time that Marino was an officer and director of it, and the conversion did not affect the obligations or liabilities of the Company arising prior to its conversion, the organizational documents of the Company during the time in which it was a Delaware corporation and the DGCL were relevant to the advancement issues.

The Company’s certificate of incorporation stated: “This Corporation shall indemnify and shall advance expenses on behalf of its officers and directors to the fullest extent permitted by law in existence either now or hereafter.” Marino and the Company disagreed as to whether this language continued to cover Marino after he ceased being an officer or director of the Company against claims arising during his service.  Marino contended, and the Court agreed, that Marino remained covered for claims challenging the propriety of his actions taken while he was serving as an officer and director of the Company.  The Court looked at Section 145 of the DGCL—Delaware’s indemnification and advancement statute—because the Company’s certificate of incorporation contemplated advancement “to the fullest extent permitted by law.”  The Court paid particular attention to (i) Section 145(e), which authorizes advancements, (ii) Section 145(j), which addresses the extent to which a covered person’s indemnification and advancement rights continue after the person leaves their position, and (iii) Section 145(f), which restricts a corporation’s ability to alter the rights after a person has served in reliance upon them.

After looking at the statutory history of Section 145 and prior precedent, the Court determined that Section 145 allows a corporation to grant mandatory advancement rights to directors and officers that provide coverage conditioned solely on an undertaking (Section 145(e)). The granted rights continue to provide coverage for actions taken by individuals during their service, even after the individuals have ceased to serve, unless the governing provision clearly states otherwise (Section 145(j)).  And, unless the governing provision provides otherwise, the granted rights cannot be altered or eliminated retroactively with respect to prior actions, after a director or officer has already exposed themselves to potential suit by acting on the corporation’s behalf (Section 145(f)).  The Court noted that this structure is set up to “encourage capable men [and women] to serve as corporate directors” as they will be “secure in the knowledge that expenses incurred by them in upholding their honesty and integrity as directors will be borne by the corporation they serve.”

Thus, when Marino agreed to serve in a covered capacity, Marino became “entitled to receive mandatory indemnification and advancements to the fullest extent of Delaware law” as part of the consideration offered to him by the Company and was entitled to advancement for covered claims. The Court therefore found that Marino was entitled to receive advancement in the Sierra Post-Judgment Motion for actions taken by Marino during his service and in his capacity as a director or officer of the Company.

However, certain of the claims made by Sierra in the Post-Judgment Motion related to actions taken by Marino after he ceased serving as a director and officer of the Company and taken on behalf of himself or other entities which he directly or indirectly controlled. The Court found that Marino was not entitled to advancement with respect to any such claims.

Marino v. Patriot Rail, C.A. No. 11605-VCL (Del. Ch. February 29, 2015)

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