Chancery Addresses Advancement and Indemnification of Corporate Officer

In Pontone v. Milso Industries Corp., C.A. No. 8842-VCP (Del. Ch. Aug. 22, 2014), the Delaware Court of Chancery addressed the rights to advancement and indemnification of attorneys’ fees for a corporate officer pursuant to both DGCL Section 145 and applicable agreements among the parties. The most notable aspect of this 65-page scholarly treatment of this recurring issue in corporate litigation is how indemnification claims will be treated when two parties have arguably overlapping obligations to indemnify, and what percentage of “fees on fees” will be awarded if a party is not 100% successful. This opinion deserves careful reading, not only by those who want to know the latest iteration of Delaware law on this topic, but also by those who want a primer on the prerequisites and nuances of Delaware law on the perennial issues presented that are of important to directors, officers and the companies they serve. 

It remains remarkable how, despite hundreds of Delaware decisions on these issues, new cases seem to present nuances that have not been addressed before. I co-author a chapter of an annually updated multi-volume treatise on corporate litigation developments that surveys court decisions around the country on indemnification and advancement, and even though the majority of cases nationwide, by far, are decided in Delaware, subtle differences in the facts of new cases often present new complexities not previously addressed by the myriad of decisions already published.

A prior related Delaware decision in this matter was highlighted on these pages.

New Article by Chief Justice Strine and Vice Chancellor Laster

To paraphrase a former tag line for a former investment management firm, when Delaware Supreme Court Chief Justice Leo Strine, Jr. and Vice Chancellor J. Travis Laster of the Delaware Court of Chancery co-author an article on a cutting-edge topic of Delaware law, those lawyers who practice in the relevant field need to “pull up their socks” and take notice.

Their article, entitled: “The Siren Song of Unlimited Contractual Freedom“, available on SSRN, addresses the issues that arise in connection with the expansive freedom of contract available in alternative entities. The Delaware jurists propose a framework that would be “both fairer and more efficient than the current patchwork yielded by the unilateral drafting efforts of entity sponsors”. The full abstract of the article follows:

One frequently cited distinction between alternative entities — such as limited liability companies and limited partnerships — and their corporate counterparts is the greater contractual freedom accorded alternative entities.  Consistent with this vision, discussions of alternative entities tend to conjure up images of arms-length bargaining similar to what occurs between sophisticated parties negotiating a commercial agreement, such as a joint venture, with the parties successfully tailoring the contract to the unique features of their relationship.
As judges who collectively have over 20 years of experience deciding disputes involving alternative entities, we use this chapter to surface some questions regarding the extent to which this common understanding of alternative entities is sound.  Based on the cases we have decided and our reading of many other cases decided by our judicial colleagues, we do not discern evidence of arms-length bargaining between sponsors and investors in the governing instruments of alternative entities.  Furthermore, it seems that when investors try to evaluate contract terms, the expansive contractual freedom authorized by the alternative entity statutes hampers rather than helps.  A lack of standardization prevails in the alternative entity arena, imposing material transaction costs on investors with corresponding effects for the cost of capital borne by sponsors, without generating offsetting benefits.  Because contractual drafting is a difficult task, it is also not clear that even alternative entity managers are always well served by situational deviations from predictable defaults.
In light of these problems, it seems to us that a sensible set of standard fiduciary defaults might benefit all constituents of alternative entities.  In this chapter, we propose a framework that would not threaten the two key benefits that motivated the rise of LPs and LLCs as alternatives to corporations:  (i) the elimination of double taxation at the entity level and (ii) the ability to contract out of the corporate opportunity doctrine.  For managers, this framework would provide more predictable rules of governance and a more reliable roadmap to fulfilling their duties in conflict-of-interest situations.  The result arguably would be both fairer and more efficient than the current patchwork yielded by the unilateral drafting efforts of entity sponsors.

 

Wall Street Journal Article on Al Gore’s New Suit in Delaware Court of Chancery

Chancery Hears Fee-Shifting Bylaws Argument

After the Delaware Supreme Court decision in ATP Tour, Inc. v. Deutscher Tennis Bund, Del. Supr., No. 534, 2013 (May 8, 2014), highlighted on these pages, in which the court  upheld fee-shifting bylaws, a number of companies have adopted such bylaws, and several cases are now pending in the Delaware Court of Chancery to determine–based on the facts of those particular cases, whether there is an equitable exception applicable to the enforceability of such bylaws.

Frank Reynolds of Thomson Reuters has written an article about one pending Chancery case where the issue has been raised and Chancellor Bouchard has asked for additional briefing before determining whether he will address the issue. For those interested in corporate litigation, it doesn’t get much more cutting-edge. See Kastis et al. v. Carter et al., No, 8657, hearing held (Del. Ch. Aug. 15, 2014).

Article on Corporate Benefit Doctrine: Basis to Award Attorneys’ Fees

Bloomberg BNA Corporate Law and Accountability Report* recently published my short article on the corporate benefit doctrine as a basis for the award of attorneys’ fees, as applied by the Court of Chancery in Sutherland v. Sutherland, a decision summarized on these pages, which was the latest installment in a long-running battle about the management of a substantial family-owned enterprise that generated many published Delaware decisions on corporate governance, spanning nearly a decade of multiple levels of litigation.

*Reproduced with permission from Corporate Accountability Report, 12 CARE 34, 08/22/2014. Copyright 2014 by The Bureau of National Affairs, Inc. (800-372-1033) http://www.bna.com

 

Justice Joseph T. Walsh, RIP

Justice Joseph Walsh recently passed away and will be sorely missed. He was a legend of the Delaware bench, having served on the Court of Chancery, Superior Court and almost two decades on the Delaware Supreme Court. He authored many important decisions on corporate law as well as other areas of the law. I had the pleasure of knowing him personally. He epitomized all the qualities that make an exemplary jurist and in addition, was universally recognized as a good man, committed to his family, faith and community. For all his accomplishments and his high stature, he was still humble, and willing to engage in conversation with even the youngest of lawyers. A proper obituary is available in the local paper.

Court Awards Fees Based on Corporate Benefit Doctrine

Sutherland v. Sutherland, C.A. No. 2399 -VCN (Del Ch. July 31, 2014).

This Delaware Court of Chancery decision involving a long-running internecine legal battle among family members who own and manage related corporations, is noteworthy because it applies the corporate benefit doctrine to a series of lawsuits among the same parties over eight years. The corporate benefit doctrine allows for the award of fees to a successful stockholder who successfully litigates against a corporation in a manner that creates a benefit for the corporation but does not create a common fund or a quantifiable sum that is attributable to the litigation.

One notable aspect of this decision is that it finds that the litigation resulted in some benefit even though not quantifiable. For example, it limited certain perquisites enjoyed by directors that were paid for by the corporation, though the savings were not readily measurable.

Also worthy of note is that a portion of the fees that were awarded, as part of the unallocated total applicable to the multiple suits filed over many years, was attributable to successfully pursuing an action under DGCL Section 220. Two observations in this regard: (i) fees are rarely awarded separately for successful Section 220 actions. This is true especially in this case where there was a prior determination that the corporation did not defend the 220 case in bad faith; and (ii) the court described the fees incurred in the Section 220 case alone as about $750,000 by the company, and over $500,000 incurred by the plaintiff. Yet another example of how expensive Section 220 cases can be.

The total fee request was $1.4 million. The court awarded $275,000. (It appears that the $1.4 million requested is not nearly the total of fees incurred by the plaintiff for all the litigation during the 9 or 10 years of multiple suits fiercely fought.)

Many of the prior Delaware decisions in the multiple suits between these parties over the last 9 or 10 years have been highlighted on these pages.

Delaware Supreme Court Requires Wal-Mart to Produce Privileged Documents

Wal-Mart Stores, Inc. v. Indiana Electrical Workers Pension Trust Fund IBEW, Del. Supr., No. 614, 2013 (July 23, 2014).

This Delaware Supreme Court en banc opinion requires Wal-Mart to produce documents about an alleged bribery scandal involving their Mexican subsidiary. Even though the initial focus of this case was on DGCL Section 220 and what documents a stockholder of Wal-Mart could demand, the most noteworthy aspect of this decision, about which we will write more later, is that for the first time the Delaware Supreme Court directly addressed and recognized an exception to the rule that documents protected by the attorney/client privilege do not need to be produced. It is referred to as the Garner exception after a case of that name from the Fifth Circuit.

In this case, the Delaware high court said that the well-established attorney/client privilege does not apply, or is subject to an exception, if a stockholder needs the otherwise inaccessible information to sue a director for breach of fiduciary duty. A similar analysis was applied to documents otherwise protected by the work-product doctrine. This opinion will have lasting importance for corporate and commercial litigators regarding this topic.

Frank Reynolds of Thomson Reuters has published an insightful article on the case that provides a helpful overview.

Michael Scher of the FCPA Blog has written extensively on the background of this case, and has provided commentary on this decision as well.

UPDATE: The venerable Professor Bainbridge observes a sampling of the commentary on this case thus far, and wonders what all the fuss is about. It may prompt me to reconsider the need to supplement this short post.

Ethics Article on Conflicts of Interest

Discussion of Key Delaware Corporate and Commercial Decisions from 2014

Delaware’s Key Corporate and Commercial Cases

January through June 2014

You are invited to a free audio conference for a discussion of the top ten decisions of 2014 to date from Delaware’s Supreme Court and Court of Chancery.

Thursday, July 24, 2014 at 3:00 p.m. EST

For the last nine years, Francis G.X. Pileggi and Kevin F. Brady have provided an annual review of key Delaware corporate and commercial decisions. In 2014, so far we have reviewed and summarized over 100 opinions from Delaware’s Supreme Court and Court of Chancery on the Delaware Corporate and Commercial Litigation Blog. Ten decisions with the most far-reaching application and importance during the first half of 2014 will be highlighted and discussed during an audio conference led by an Eckert Seamans’ team of corporate and commercial attorneys. Participants can dial-in on Thursday, July 24, 2014 at 3:00 p.m. EST.

Register and obtain a dial-in number by sending an email to: lbrinjac@eckertseamans.com

Speakers:

Francis G.X. Pileggi practices primarily in the areas of corporate and commercial litigation. He has extensive experience in matters involving fiduciary duties and corporate governance as well as summary proceedings under the Delaware General Corporation Law. Francis created and maintains the Delaware Corporate and Commercial Litigation Blog at www.delawarelitigation.com.

Kevin F. Brady represents clients in corporate and commercial litigation in the Delaware Court of Chancery, the Delaware Superior Court and the U.S. District Court for the District of Delaware. He counsels corporations, boards of directors, officers, individual directors, and individual shareholders in a wide range of issues involving corporate governance and interpretation of the Delaware General Corporation Law and federal securities matters.

Tara L. Lattomus represents clients in corporate and commercial litigation, bankruptcy and creditors’ rights and labor and employment matters. She has experience in representing both creditors and debtors in insolvency proceedings and has litigation experience in state and federal courts in commercial litigation matters on behalf of both national and local clients. She frequently publishes articles and makes presentations on recent Delaware decisions.

Jill K. Agro practices in the area of corporate and commercial litigation and represents a broad range of clients, including corporations, stockholders, directors, officers and members and managers of alternate entities. Jill has an extensive background representing clients in Delaware’s Court of Chancery.

SUPPLEMENT: Professor Bainbridge, one of the nation’s foremost corporate law scholars and often cited in Delaware opinions, graciously highlighted this event on his blog. It doesn’t get much better than that–to get such a positive mention by a luminary.