The Delaware Court of Chancery granted in part and denied in part Plaintiff’s partial motion to dismiss, finding that the standard for breach of fiduciary duty was not met as against certain directors and officers of the Company based on allegations they failed to disclose facts relating to a tender offer, but was met as against the directors and one of the officers on allegations that they approved a tender offer where they were expected to receive a personal financial benefit.Read More
In Brown v. Rite Aid Corp., C.A. No. 2017-0480-MTZ (Del. Ch. May 24, 2019), the Delaware Court of Chancery granted the motion for partial summary judgment of plaintiff Franklin Brown (“Brown”), entitling Brown to indemnification by defendant Rite Aid Corporation (“Rite Aid”) for legal fees and expenses Brown incurred in proceedings arising out of a corporate fraud and accounting scandal in 2002. The court re-affirmed the principles that mandatory indemnification is dependent strictly on the outcome of the underlying action and that the “indemnitee need not be adjudged innocent in some ethical or moral sense,” a defendant need not pursue victory efficiently, and that indemnification is based on the reason by which a defendant is party to the action.Read More
By Joanna A. Diakos Kordalis and Tom Sperber
In Beck v. Greim c/o Bombay Woods Maintenance Corp., the Delaware Chancery Court issued a Master’s Report making recommendations regarding a dispute between a homeowner, who had served as a director and officer of the homeowner’s association, and the homeowner’s association and its president, concerning alleged violations of Delaware General Corporation Laws and the association’s failure to enforce deed restrictions under Del. C. § 348. Andrea Beck (“Plaintiff”), one of three directors and the treasurer of Bombay Woods Maintenance Corporation (“Bombay”), which is a homeowner’s association, alleged that the other two board members, John Greim (“Greim”) (with Bombay, “Defendants”) and Jeffrey Horvat (“Horvat”) (with the Defendants, the “Adverse Parties”), improperly removed her as a director and officer of Bombay and failed to maintain common areas adjacent to her property. Based on the evidence presented at trial, the Master recommended that the Court find that Plaintiff was properly removed as treasurer, but improperly removed as a director. The Master further recommended that the Court order that Bombay remedy the improper removal by conducting a special meeting of its members to vote on Plaintiff’s removal or holding an annual election of its board of directors, or by following the Delaware Uniform Common Interest Ownership Act procedures for removal of a board member. The Master also recommended that the Court conclude that Bombay’s deed restrictions were not violated by failing to maintain aspects of Bombay’s common areas as claimed by Plaintiff.
In 2013, Plaintiff and two other homeowners were elected to the board of directors of Bombay. The other two members immediately resigned, causing the Plaintiff to appoint Greim and Horvat to the board of directors and to the positions of president and vice president/secretary, respectively. Plaintiff was appointed treasurer. During a board meeting in early, 2014, Greim and Horvat asked Plaintiff to resign from the board of directors. When Plaintiff refused to do so, Greim and Horvat voted to remove her as a director and treasurer. Later in 2014, Greim and Horvat scheduled a members meeting to have a confirmatory vote on Plaintiff’s removal. When too few members attended to form a quorum, Greim and Horvat went door to door collecting ballots. On October 20, Greim and Horvat notified Plaintiff that the members had voted to remove her as a director.
Plaintiff filed a pro se complaint against Defendants in the fall of 2014, alleging the aforementioned claims and others relating to mismanagement of Bombay’s funds and failing to enforce proper voting measures under Bombay’s bylaws. Through several letter opinions and final reports, it was held that, without counsel, Plaintiff could only pursue claims of improper removal from her positions under Section 225 of the Delaware General Corporation Law and failure to enforce deed restrictions under another provision of the Delaware Code. While the Court would look to the bylaws for several of these claims, Plaintiff contended that the bylaws were never recorded and thus were invalid. Rather than address that issue, the Master made his recommendation by analyzing the Delaware Uniform Common Interest Ownership Act (the “DUCIOA”) and Bombay’s bylaws in the alternative. While Bombay’s formation predated the enactment of DUCIOA, some provisions apply to pre-existing communities, while others control “only if the matter at issue is not expressly addressed in the community’s governing documents.”
To support Plaintiff’s claim that Greim and Horvat improperly removed her as treasurer, Plaintiff argued that the agenda on the member notice of the board meeting in question did not include the vote to remove Plaintiff from her position. She also alleged that because they were improperly elected to the board, they had no ability to remove her. In analyzing these claims, the Court looked to Bombay’s bylaws. The DUCIOA does not address the removal of officers and none of Bombay’s other organizational documents speak to the issue. The Court pointed to the provision of the bylaws granting the board the authority to choose and appoint officers and “remove any officer that it chose or appointed, ‘with or without cause at any time by the affirmative vote of a majority of the whole Board of Directors.’” While the Court acknowledged that the bylaws require member notice of board meetings, they do not speak to whether posting a proposed agenda is required. The Court pointed out that while DUCIOA does have notice requirements for board meetings, those provisions do not apply to pre-existing communities.
In arguing that her removal from the board was invalid, Plaintiff restated her arguments for her claim of improper removal as treasurer and additionally alleged that the members did not participate in the meeting to vote on her removal. The bylaws stated that directors may be removed with or without cause by a majority vote of the members, assuming that the required 51% quorum votes in person or by proxy. The DUCIOA states that board members can be removed without a quorum only when procedures for “special meetings” are followed. These procedures include providing an opportunity for members to speak concerning the removal, a recession of the meeting, and a notification of the availability to vote within 30 days.
The Master found that the procedure used by Greim and Horvat to remove Plaintiff from the board violated both the bylaws and the DUCIOA. The quorum requirement of the bylaws was not met, therefore the members could not have properly voted on Plaintiff’s removal. While Greim and Horvat eventually got the necessary votes by going door to door and collecting ballots, the Master found that the bylaws only authorized the board to take removal actions during meetings. The Master also found that the irregularities in the voting process violated the less stringent but still particular “special meeting” procedure of the DUCIOA for a removal proceeding without a quorum. While the Master concluded that Plaintiff was improperly removed, he refused to recommend that she be reinstated after her four year absence. Instead, the Master recommended, among other things, that the Court order that Bombay conduct a special meeting of Bombay’s members to have a procedurally proper vote on Plaintiff’s removal.
The Master quickly dispatched with Plaintiff’s argument that Greim and Horvat were improperly elected to the board by pointing out that, consistent with the bylaws, Plaintiff appointed them to the board when she was the only director. The Master also found that Plaintiff had failed to present any evidence to support her claim that the Adverse Parties had failed to maintain the common areas around her property.
In R.A. Feuer on behalf of CBS Corporation v. Sumner M. Redstone (C.A. No. 12575-CB (Del. Ch. April 19, 2018)), R. A. Feuer (“Plaintiff”), a stockholder of CBS Corporation (“CBS”) brought a derivative suit against the directors of CBS Corporation (“Board”) alleging corporate waste, bad faith, and unjust enrichment for compensation in excess of $13 million dollars paid to Sumner Redstone, the controlling stockholder, former executive chairman and chairman emeritus of CBS (“Redstone”). The payments were made under an extreme set of circumstances that resulted in the claims partially surviving a Rule 23.1 motion to dismiss for failure to make a pre-suit demand on the board and a 12(b)(6) motion to dismiss for failure to state a claim upon which relief could be granted. Read More
In Meyers et al. v. Quiz-Dia LLC et al., No. 9878-VCL (Del. Ch. June 6, 2017), the Court of Chancery, entered a summary judgment in favor of the plaintiffs entitling them to indemnification from Quizmark LLC (“Quizmark”) and QCE Gift Card LLC (“QCE Gift Card”). The Chancery Court also determined that the plaintiffs were not entitled to indemnification from Quiz-Dia LLC (“Quiz-Dia”).
The plaintiffs, Greg MacDonald (“MacDonald”) and Dennis Smyth (“Smyth”), were officers of the principal operating entity of Quiznos, QCE LLC (“OpCo”), and claim to have been officers of all of OpCo’s subsidiaries, including Quizmark, QCE Gift Card, and Quiz-Dia (collectively, the “Subs”). By 2012, various investment funds (the “Funds”) had accumulated substantial positions in OpCo’s debt and OpCo was having difficulty operating its business. This granted the Funds the power to declare a default under OpCo’s loan agreements. To neutralize the threat of default, OpCo entered into a complex restructuring transaction which transferred the ultimate ownership of OpCo and its subsidiaries to the Funds (the “Restructuring”). MacDonald and Smythe left Quiznos shortly thereafter.
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.
In Gorman, IV v. Salamone, Halder and Westech Capital Corp. (“Westech”), the Delaware Chancery Court, in ruling on a motion to dismiss, issued another status quo order to temporarily fix the composition of the board of Westech while the ongoing dispute over control of Westech played out.
Plaintiff John Gorman (“Gorman”) a Westech stockholder and board member brought the Section 225 action based on two developments while a prior Section 225 temporarily designating three directors and keeping the CEO was on appeal before the Delaware Supreme Court.
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.