Chancery Applies Discounted Cash Flow Analysis in Valuation Decision

Justin Forcier, an associate in the Delaware office of Eckert Seamans, prepared this overview.

The Delaware Court of Chancery recently applied a discounted cash flow (“DCF”) analysis to value a privately-held company following a merger between ISN Software Corp. (“ISN”) and ISN’s wholly-owned subsidiary, with ISN continuing as the surviving company.  In re ISN Software Corp. Appraisal Litigation, C.A. 8388-VCG (Del. Ch. Aug. 11, 2016).  No financial advisor or investment bank was consulted prior to the merger nor did ISN obtain a fairness opinion.  Two minority stockholders, Polaris and Ad-Venture, filed an action under 8 Del. C. § 262 for a statutory appraisal.

Background: Three experts opined on the value of ISN’s value at the time of the merger.  However, those experts held wildly-divergent opinions.  One expert who testified on ISN’s behalf reasoned that the company was worth $29,360 per share.  However, Polaris’s and Ad-Venture’s experts believed that ISN was worth $230,000 and 222,414 per share respectively.

The court noted that each expert factored a DCF analysis into the method used to determine their valuations.  However, the experts only gave the DCF partial weight.  The experts also used other valuation methods in their analysis, which included guideline public companies, prior transactions, and direct capitalization of cash flow.

The court rejected all of the methods besides the DCF because ISN was a privately-held company, which had not yet reached a state of steady growth, and whose stock was illiquid.  Therefore, the court found the DCF method to be the only appropriate method.

As many know, the DCF method estimates a company’s future value by summing the future cash flows and discounting them to present value.  The court selected a five-year projection period, which it acknowledged has become the typical period used in DFC analyses.

 Analysis: The court found that ISN’s expert’s analysis represented the best indication of ISN’s value, but felt it was necessary to depart from that analysis in some significant ways.  The court adjusted the analysis by:

  1. Removing the expert’s annual cash flow adjustment for incremental working capital;
  2. Adding a cash flow adjustment for the change in deferred revenue;
  3. Adjusted the cash flow for 2014 to account for a $16.5 million expected tax refund;
  4. Adding $34 million to ISN’s DCF for the balance of the “Buyout and Litigation Reserve”;
  5. Using a size premium of 2.46%, based on Ibboston’s 8th decile to determine ISN’s cost of equity; and
  6. Using a cost of equity of 10.46% based on the capital asset pricing model.

Holding: Taking all of that into account, the court held that ISN was worth $357 million at the time of the merger, or $98,783 per share.

The court also held that both parties were entitled to statutory interest.  Interest was awarded to Polaris as of the date of the merger, because that was the date Polaris was deprived of all of its stock.  Ad-Venture was not deprived of its stock, but the merger did grant it an appraisal right, which Ad-Venture perfected three weeks after the merger.  Therefore, the court held that Ad-Venture was entitled to interest starting on the date that it filed this action.

Finally, the court denied the stockholders’ request for attorneys’ fees and costs.  The court acknowledged that the stockholders had difficulty obtaining discovery that should have been easily obtainable.  However, the parties were able to develop a full record and the difficulty did not rise to the level of prejudice.

Court of Chancery rejects claim under the Deceptive Trade Practices Act

Any newcomer to Delaware would note the proliferation of business names containing some variation on “Diamond State” or “Blue Rock” – and, as the Court of Chancery recently noted in its letter opinion in Diamond State Tire, Inc. v. Diamond Town Tire Pros & Auto Care, Inc., C.A. No. 11550-VCS (August 15, 2016), the inclusion of “Diamond State” in a name “is so common in Delaware as to justify very little, if any, protection.”  The Court concluded that Diamond Town Tire had not violated Delaware’s Deceptive Trade Practices Act, and employed the following multi-factor test enunciated in Draper Commc’ns, Inc. v. Del. Valley Broadcasters Ltd. P’ship, 505 A.2d 1283 (Del. Ch. 1985):  

(i) the degree of similarity between the marks, (ii) the similarity of products for which the name is used, (iii) the area and manner of concurrent use, (iv) the degree of care likely to be exercised by consumers, (v) the strength of the plaintiffs’ mark, (vi) whether there has been actual confusion, and (vii) the intent of the alleged infringer to palm off his products as those of another.



Court of Chancery Awards Mootness Fees for Additional Disclosures

Justin Forcier, an associate in the Delaware office of Eckert Seamans, prepared this overview.

The decision in this matter should be of widespread interest to corporate litigators and is the latest in the evolution of disclosure-only settlements following the  Delaware Court of Chancery’s decision in In re Trulia Inc. Stockholder Litigation, C.A. No. 10020-CB (Del. Ch. Jan 22, 2016), which was covered previously on these pages.  In the decision in this case of In re Xoom Corp. Stockholders Litigation, C.A. No. 11263 VCG (Del. Ch. Aug. 4, 2016), the Delaware Court of Chancery awarded the stockholder plaintiffs (“Plaintiffs”) attorneys’ fees totaling $50,000.

Overview:  The fee application in this case stems from a suit filed by Plaintiffs after PayPal Holdings, Inc. (“PayPal”) announced that it would acquire Xoom Corporation (“Xoom”) in a stock purchase.  Following that announcement, Plaintiffs sued, but voluntarily dismissed the action and moved for fees under the theory that Plaintiffs’ efforts forced additional disclosures from Xoom that eventually mooted the lawsuit.

Analysis: The court began its analysis by reciting the well-known truth that Delaware follows the American Rule when it comes to attorneys’ fees and costs.  Of course, there are exceptions to the Rule.  The court stated that a mootness fee award “is a subspecies of the common-benefit doctrine, which recognizes that, where a litigation provides a benefit to a class or group, costs necessary to the generation of that benefit should be shared by the group or its successor.”

The only question for the court was whether the additional disclosures added any value to the stockholders and, if any value was added, how much of Plaintiffs’ fees should be allocated to Defendants.

First, the court stated that “to support a settlement and class-wide release based on disclosures only, the materiality of the disclosures to stockholders must be plain.”  The court observed that claims were moot and voluntarily dismissed with prejudice only to Plaintiffs.  Thus, the class did not “give” anything material, but it did “get” additional disclosures.

The court held that the first disclosure, which revealed a conflict with Xoom’s financial advisor, was only slightly helpful because stockholders were already aware of the conflict.  Next, information that was provided regarding the lack of value Xoom attributed to a potential recovery was “somewhat valuable at best.”  Because no new information was contained in the disclosure and it did not cause the merger consideration to become questioned, there was little benefit to the stockholders.  The court held that additional disclosures regarding management’s discussions of future employment were of little value too.  Those employment disclosures were general and PayPal was the only bidder.  Thus, this was not a case where one bidder could have leveraged its knowledge of management’s employment concerns.

However, although none of these single disclosures added much value to the stockholders, taken together, the court did find that they added a modest benefit.  Therefore, the entire amount sought—$275,000—was not warranted.  Instead, the court awarded fees and costs of $50,000.

This decision does not appear to be a resurrection of disclosure-only settlements.  The Court of Chancery recently denied a mootness fee award in In re Keurig Green Mountain, Inc. Stockholder Litigation, C.A. No. 11815-CB (consol.), transcript (Del. Ch. July 22, 2016), because it found that the supplemental disclosures of pre-merger employment discussions failed to confer any compensable benefit on the stockholders.  That decision was recently featured in The Chancery Daily. 

Chancery Addresses Tools and Principles for Corporate Litigators

The Delaware Court of Chancery recently selected lead counsel and lead plaintiffs in response to competing motions in connection with class action stockholder litigation, applying the well-worn principles in Hirt v. U.S. Timberlands Service Co., 2002 WL 1558342, at * 2 (Del. Ch. July 3, 2002).  In the course of applying those factors to the facts of the instant case, moreover, the court addressed the substantive issues of law that have wider application to those engaged in corporate litigation.  In re Investors Bancorp, Inc. Stockholder Litigation, C.A. No. 12327-VCS (Del. Ch. Aug. 12, 2016).  The following bullet points are useful for the toolbox of corporate litigators:

  • The Delaware courts have recognized other “tools at hand” in addition to using § 220 to obtain information before preparing a plenary complaint. They include media reports and governmental agencies such as the SEC. This discussion was in the context of comparing the pleadings of one of the plaintiffs’ counsel competing for lead counsel position who availed himself of § 220 prior to filing the complaint, and the other competing counsel who did not use § 220. The court also provides a useful comparison of the pros and cons of using § 220 before preparing a plenary complaint as well as the procedural merits and disadvantages of using § 220. See footnotes 11 and 12.
  • The court discussed the standards of review that would be applicable to challenge a board decision involving allegedly excessive compensation, and those instances in which the board’s decision to approve compensation might be subject to either the BJR or the entire fairness standard. See footnotes 18 and 19 and accompanying text.
  • The court analyzed those circumstances in which a series of transactions will be considered either separately or collectively based on the particularized facts, and whether the transactions constituted a single, self-interested scheme and/or a quid pro quo. See footnote 20.

Chancery and The Wall Street Journal

The Delaware Court of Chancery was mentioned in an editorial on the opinion page of The Wall Street Journal today in connection with a decision by Judge Posner of the U.S. Court of Appeals for the 7th Circuit in which he rejected a “disclosure only” settlement. In re Walgreen Co. Stockholder Litigation, No. 15-3799, opinion (7th Cir. Aug. 10, 2016). Readers of these pages are familiar with the Chancery decision earlier this year in the case of In Re Trulia Stockholder Litigation, and other relatively recent Delaware opinions in which the Court of Chancery made it much more difficult to obtain court approval for stockholder class actions in which the benefit to the class was additional disclosure about the terms of the deal that was being challenged. Indeed, Judge Posner quoted from the Trulia opinion, and relied on its reasoning in denying the proposed settlement and attorneys’ fees in the Walgreen case.

Recent reports indicate that the number of suits challenging deals valued at over $100 million has declined from a high of over 90% of deals to a substantially lower percentage, post-Trulia. The Chancery Daily provides a fuller analysis and more detailed commentary in its recent editions.

Chancery Dismisses Caremark Claims

A recent Delaware Court of Chancery decision serves as a reminder that Caremark claims are among the most difficult corporate litigation claims to make against directors. Melbourne Municipal Firefighters’ Pension Trust Fund v. Jacobs, C.A. No. 10872-VCMR (Del. Ch. Aug. 1, 2016).  Of course, most readers are aware that Caremark is the colloquial reference for claims that a board of directors breached its duty of loyalty because it was on notice of risky corporate conduct and consciously disregarded its duty to remedy or prevent such misconduct.


This case involved claims that the directors of Qualcomm, Incorporated, were aware of violations of antitrust laws in the U.S. and in other countries in which it operates, based on fines levied or settlements paid for antitrust violations in several countries, but nevertheless the board allegedly did not take sufficiently proactive action to prevent such antitrust violations from taking place.

Useful Principles of Law for Corporate Litigators

The court provides a useful reiteration of the well-known corporate litigation rules regarding pre-suit demand and demand futility.  Plaintiffs contended that pre-suit demand was excused pursuant to Court of Chancery Rule 23.1, which excuses pre-suit demand when a plaintiff demonstrates:  “That any such demand would have been futile and, therefore, that the demand is excused.”

Where, as in this case, the allegation is that a company suffered corporate trauma because the board acted in bad faith by consciously disregarding their duty to oversee the company’s compliance with applicable laws, Delaware courts generally apply the test to analyze demand futility employed in the Delaware Supreme Court decision of Rales v. Blasband, 634 A.2d 927 (Del. 1993).

Pre-Suit Demand Futility

In Rales, the high court of Delaware explained that when a plaintiff challenges the inaction of directors, as opposed to a specific action, in that instance “a court must determine whether or not the particularized factual allegations of a derivative stockholder complaint create a reasonable doubt that, as of the time the complaint is filed, the board of directors could have properly exercised its independent and disinterested business judgment in responding to a demand.”  The Court of Chancery in this case explained that:  “Demand is not excused solely because the directors would be deciding to sue themselves, and the mere threat of personal liability . . . is insufficient to challenge either the independence or disinterestedness of directors.”  See footnote 39.  The court continued that under the demand futility test, it is necessary that “a majority of the board must face a ‘substantial likelihood’ of personal liability for demand to be excused.”

Caremark Claim

A practical explanation of the elements of a Caremark claim were explained by the court in this opinion.  See In re Caremark International Inc. Derivative Litigation, 698 A.2d 959 (Del. Ch. 1996).  The court observed that:

“In a typical Caremark case, plaintiffs argue that the defendants are liable for damages that arise from a failure to properly monitor or oversee employee misconduct or violations of law.  The claim is that the directors allowed a situation to develop and continue which exposed the corporation to enormous legal liability and that in so doing they violated a duty to be active monitors of corporate performance.  A Caremark claim is possibly the most difficult theory in corporation law upon which a plaintiff might hope to win a judgment, and bad faith on the part of the corporation’s directors is a necessary condition to liability.”

See footnotes 47 through 49.  The court elaborated that it is common for plaintiffs attempting to satisfy the elements of a Caremark claim to plead that the board “had knowledge of certain ‘red flags’ indicating corporate misconduct and acted in bad faith by consciously disregarding its duty to address that misconduct.”  See footnote 51.

The court found that in this case the complaint did not plead facts from which the court could reasonably infer that the board acted in bad faith.  Nor did the court find that the board ignored red flags or that there was any causation between red flags that were allegedly ignored and damages to the company.

Bad Faith Defined

Bad faith requires adequately alleging particularized facts from which it can be reasonably inferred that a board consciously disregarded its duties by intentionally failing to act in the face of a known duty to act.  The court defined “conscious disregard” as involving “an intentional dereliction of duty which is more culpable than simple inattention or failure to be informed of all facts material to the decision.”  See footnote 59.

The necessary inaction and the lack of good faith necessary for a Caremark claim requires “a sustained or systematic failure of the board to exercise oversight.  Simply alleging that a board incorrectly exercised its business judgment and made a ‘wrong’ decision in response to red flags, however, is insufficient to plead bad faith.”  See footnote 62.  The court distinguished the facts of this case from the Massey and Pyott cases which involved more egregious facts and admissions of wrongdoing.

Moreover, the board in this case was under the impression that its conduct did not violate applicably antitrust laws. The court concluded that the allegations did not satisfy the essential elements of a claim for bad faith.

Chancery Allows Claims Against Directors for Interested Transaction

A recent Delaware Court of Chancery decision should be useful to corporate litigators for its practical explanation of the type of transaction that will be considered an “interested” one and subject to the entire fairness standard.  In re Riverstone National, Inc. Stockholder Litigation, Consol. C.A. No. 9796-VCG (Del. Ch. July 28, 2016).


The background of this case involves a merger which included a provision that the purchaser waived the right to pursue any claims against the selling directors for usurpation of corporate opportunity, and the value of that asset – – the claim, that the Court referred to as a chose-in-action, was lost and not accounted for as part of the merger consideration.  The Defendant Directors, to the extent that they were also stockholders, received an additional benefit not shared by other stockholders:  they were relieved of potential liability they faced in connection with the usurpation claim.

The parties spent considerable time and attention in their briefs on the issue of standing, and the argument that standing for derivative claims was lost when the merger extinguished the stock ownership of the plaintiffs.  But, the court did not find the standing issue to be important, and instead regarded the allegations as forming a direct claim that still belonged to the plaintiffs after the merger, based on the argument that the directors were “interested” in the merger and that the merger price was unfair.

The essence of the court’s articulation of the issue was that the Director Defendants violated their fiduciary duties in connection with the merger when they failed to obtain consideration for the value of the claims of usurpation of corporate opportunity, and therefore, the value of those claims that were not included, and which were material, made the price of the merger unfair.


The court held that the majority of the Director Defendants were interested in the merger and the plaintiffs alleged sufficient facts – – at the motion to dismiss stage, to show that the merger was unfair, and the entire fairness standard of review applies.  The court also determined, in light of that holding, that the issue of standing need not be addressed because the court determined that the plaintiffs stated a direct claim.

Highlights of Important Principles of Law

Many important legal principles are carefully recited in this opinion and although most of these principles are well known to readers of this blog, it remains useful to highlight them as a reminder of fundamental principles of corporate litigation.

BJR Defined

The court described the well-known business judgment rule as follows: “Directors are presumed to act in the best interest of the corporation and their independent and disinterested actions in that regard are therefore largely insulated from review.”  See footnote 82.  There are exceptions to that deferential standard when the business judgment rule is rebutted.  For example, the court will apply a higher standard of review – – enhanced scrutiny – –  which allows injunctive relief to protect the interest of the stockholders in receiving the best value for their shares.  See, e.g., Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173, 182 (Del. 1986).  Another exception to the application of the BJR is when the existence of bad faith or waste has been adequately alleged.

Importantly, the court emphasized that even in the merger context, when the fairness of the merger is challenged, the stockholders must plead facts that, if true, rebut business judgment and demonstrate a non-exculpated breach of duty, otherwise judicial review ends.  See footnote 85.

When Entire Fairness Standard Applies

When stockholders plead particularized facts in connection with board action which demonstrates, if true, that the directors acted in a way, for example, such that their loyalty is divided between corporate interest and material self-interest, then the standard of review is entire fairness, and the burden shifts to the directors to demonstrate that the merger developed a fair price from a fair process.

Definition of “Interested” Director

Related to this analysis is whether a majority of the directors were disinterested and independent.  The court defined a director who was interested as involving a transaction where a director appears on both sides of the table or expects to derive a personal financial benefit separate from the benefits bestowed to stockholders generally.

Definition of “Independent” Director

The court defined a director that may lack independence as one who “rather than basing a decision on the merits to the corporation,” made a decision relying on “extraneous considerations or influences.”  See footnote 88.  The allegations of disloyalty in this case were based on the obliteration of a claim against the directors for usurpation of corporate opportunity which resulted from the merger in which the buyer agreed to waive that claim.

Considerations for Determining When a Claim Against Directors that was Extinguished by a Merger Will Be Permitted to Proceed   

(1) The existence of a “chose-in-action” against the directors; (2) Which is brought as a claim that would have survived a motion to dismiss; (3) That the directors at the time of the negotiating and recommending the merger were aware of the potential action; (4) The potential for liability was material to the directors; (5) The directors obtained and recommended an agreement that extinguished the claim directly by contract; (6) The pleading is made with respect to a majority of the directors; and, (7) The complaint is sufficient to rebut the business judgment rule.

Usurpation of Corporate Opportunity

In connection with analyzing these factors, the court provides a definition for usurpation of corporate opportunities.  See footnote 91.  The court provided a thorough application of the elements of such a claim to the specific facts of this case.  In addition to analyzing the elements of a claim for usurpation of opportunity, the court also applied the above listed factors that will be considered in order to allow a claim extinguished by merger to proceed.

The court found that the claim that could have been made against the directors prior to the merger was a viable one that presented the potential for personal liability that was material.  The Defendant Directors approved the merger which precluded prosecution of claims as a matter of contract.  The Defendant Directors secured this benefit that was not shared by other stockholders.  In light of this self-interest, their duty of loyalty is implicated, and they no longer enjoy the presumption of the BJR.

Shifting of Burden Pursuant to Entire Fairness Standard

The court explained that once the plaintiff rebuts the BJR, the burden shifts to the defendant to establish that the merger was the product of both fair dealing and fair price.  Even though the application of the entire fairness standard would normally preclude a dismissal of a complaint under Rule 12(b)(6), even in a self-interested transaction in order to state a claim a shareholder must allege some facts that tend to show that the transaction was not fair.  See footnote 138 (citing the 2015 Delaware Supreme Court decision of In re Cornerstone, which stated the important principle that a plaintiff must plead a non-exculpated claim for breach of fiduciary duty against an independent director protected by an exculpatory charter provision, or that director will be entitled to be dismissed from the suit.)  This rule applies regardless of the underlying standard of review for the transaction.

Chancery Compares Claims Against Director Based on Fiduciary Duty and Contract

The Court of Chancery in Jeter v. RevolutionWear, Inc., C.A. No. 11706-VCG (Del. Ch. July 19, 2016), provides a helpful explanation and application of several basic principles of Delaware corporate and commercial law that are useful to include in the toolbox of corporate and commercial litigators.

Background Facts:

The court’s opinion begins with the admonition that: “This case provides a cautionary tale of the mixing of roles in a corporate-governance setting.” The facts of the case involve a well-known professional baseball player who was given an equity interest in, and made a director of, a company that sold sportswear, in exchange for an understanding that he would promote the products. The facts are heavily disputed about whether there was an express condition precedent or an express obligation of the baseball player to formally and unequivocally endorse the products made by the company.

The opinion addresses overlapping principles of corporate law and commercial law to the extent that there was a contract dispute as well as allegations that the baseball player breached his fiduciary duties as a director.

Legal Principles Addressed:

This opinion features one of the rare instances where a motion to dismiss a claim for the breach of the implied covenant of good faith and fair dealing is denied. The court also upheld a claim of fraudulent inducement. The court found that the doctrine of equitable tolling applied to extend the statute of limitations based on the reasonable conceivability that the fraud claims were concealed by a failure of the baseball player to expose the terms of a contract that might have conflicted with his representations in the agreement at issue in this case. For example, a prior deal with Nike barred him from endorsing other products.

Pleading Requirement to Plead Fiduciary Duty Breach:

Because of the exculpatory provision in the charter, the allegation of a breach of fiduciary duty that plaintiff had to establish at the pleading stage requires a reasonable conceivability of a non-exculpated duty: the fiduciary duty of loyalty. See footnote 104.   A useful definition of the duty of loyalty was explained by the Court, which explained:

… that the best interest of the corporation and its shareholders takes precedence over any interest possessed by a director, officer or controlling shareholder and not shared by the stockholders generally. Corporate fiduciaries ‘are not permitted to use their position of trust and confidence to further their private interests in ways inimical to the corporation. Encompassed within the duty of loyalty is the requirement that a director act in good faith. Although the duty to act in good faith may be invoked with regard to a variety of behavior, RWI contends that it has pled a breach of the duty to act in good faith by showing that Jeter ‘intentionally act[ed] with a purpose other than that of advancing the best interests of the corporation’.

See footnote 104 through 109.

The court observed that contractual obligations may give rise to breach of contract claims but they do not alter the fiduciary obligations of the director. It appears that the contractual obligations of the baseball player enlarged the company’s expectations of Jeter beyond his fiduciary obligations. Thus, the court explained, that all but the claim that Jeter made false statements to investors must be dismissed for failure to state a claim. The court found that Jeter made statements to investors to encourage investment which were knowingly false, and in bad faith, and therefore sufficiently pleads a claim of breach of fiduciary duty – – to the extent that a court must assume the truth of the pleadings at this early stage.

In sum, this 39-page decision carefully analyzes many factual details on which each of the claims are based, and explains which of the claims survived a motion to dismiss based on the facts.

Supplement: The author of this opinion is very precise in the use of his words, and footnote 90 is indicative of that careful use. Regarding the use of the word “fulsome” that one of the parties used in their brief, the court observed in footnote 90: “I hereby renounce, in defeat, a pedantic pet peeve: I confess that in today’s United States, ‘fulsome’ is a sesquipedalian synonym for ‘full,’ Mr. Webster’s dictionary be damned. I give up, I give in, I yield to the majority; I will no longer be stuck in fulsome prison.” (No doubt referring to the Folsom Prison in a famous Johnny Cash song called “The Folsom Prison Blues.“)

Advancement Denied Based on Prior Ruling Resulting in Issue Preclusion

A recent Chancery decision is notable partly because it falls within the minority of advancement cases that deny advancement of fees to a former employee who was given the title of vice president. Its application may be limited due to procedural quirks and its reliance on New Jersey law. In Aleynikov v. The Goldman Sachs Group, Inc., C.A. No. 10636-VCL, Order and Final Judgment (Del. Ch., July 13, 2016), the Court of Chancery’s post-trial decision features an unusual result in that a vice president was denied advancement, but the 17-page Order of the court was based primarily on the doctrine of “issue preclusion”, and in particular how that concept was construed under New Jersey case law. Thus, it may not be of widespread usefulness in other Delaware corporate litigation regarding advancement.

The Court of Chancery also explained why it disagreed with an analysis of the doctrine of contra proferentem as applied by the U.S. Court of Appeals for the Third Circuit, but nonetheless felt constrained by its decision based on the doctrine of issue preclusion. Notwithstanding its obligation to follow that prior ruling, for much of the 17-pages of the Order, the Court of Chancery explained why it disagreed with the Third Circuit and why it would have reached a different conclusion. This case is now on appeal before the Delaware Supreme Court.

This case should be compared to another recent decision which also shares the uncommon result of denying advancement to someone with the title of an officer. See Pulier v. Computer Sciences Corp., highlighted on these pages. That separate case was also impacted by the application of another state’s law.

Procedural History

The procedural history of this case is somewhat tortuous. Initially, the United States District Court for the District of New Jersey granted summary judgment in favor of Aleynikov on the advancement issue, but on appeal, the United States Court of Appeals for the Third Circuit reversed and vacated the trial court’s ruling. Aleynikov then filed the instant action in Delaware seeking an interpretation of his rights under Delaware law. On April 28, 2016, the Court of Chancery held a one-day trial.

Useful Aspects of Decision

Based on the finding that the court was bound by a prior ruling of another court, which in turn was based on New Jersey law, this Order has limited application, and that is one reason the court likely explained its 17-page decision in the form of an Order, as opposed to a formal opinion. Nonetheless, the Court’s discussion of the doctrine of contra proferentem, as well as the concept of in pari materia when interpreting the bylaws of a parent company and the different bylaws of its subsidiaries, could have useful application. Also useful is the truism observed by the court that corporations have the authority to extend the benefits of advancement not only to officers but also to all employees and agents of a company. See DGCL Section 145(e).

Compare Recent Similar Holding

This case should be compared to another recent Chancery decision in a separate matter that also reached the unusual conclusion of not awarding advancement; and that case was also based on non-Delaware law and the constrained interpretation of the word “officer” under Nevada law and Nevada bylaws. See Pulier v. Computer Sciences Corp., et al., C.A. No. 12005-CV (transcript) (Del. Ch. May 12, 2016), as highlighted on these pages here.


Court Awards Advancement to Officer of Affiliated Entity

Narayanan v. Sutherland Global Holdings Inc., C.A. No. 11757-VCMR (Del. Ch. July 5, 2016). This Delaware Court of Chancery opinion addressed: (1) Whether separate sources of indemnification, including the company’s bylaws and an indemnification agreement, must be read together or separately; (2) Whether the plaintiff-director served the entity at the request of the company or for his own personal benefit; and (3) Whether the court should delay granting the request for fees, and fees-on-fees, until after the court determines that the company is liable for those fees. Each of the issues was decided in favor of the plaintiff-director.

Brief Overview:

Although Delaware entities were involved, many of the activities giving rise to this case occurred in India. One of the developments that precipitated the litigation by the plaintiff-director, is that upon his retirement, the company did not honor its alleged obligation to buy his shares. The plaintiff-director took legal action to obtain payment for his shares. The initial action was filed in federal court in New York and the Company filed counterclaims. The Company also filed a criminal complaint against the plaintiff-director in India alleging breach of duties.

Basis for Advancement:

The three instruments on which the claims for advancement are based are: (1) The certificate of incorporation; (2) bylaws, and (3) indemnification agreement. After making a demand and attaching an undertaking, the complaint in this matter was filed on November 30, 2015. It is noteworthy that the trial was held within 70-days after the complaint was filed, and this 44-page opinion was issued promptly thereafter.


(1) The court held that the bylaws are a separate and independent source of indemnification and advancement that do not require cooperation even though other documents might have that as a condition; (2) The controller of the company requested that the plaintiff-director serve in both entities involved in this matter and that satisfied any prerequisites for advancement; and (3) There is no further reason to delay vindicating the right to advancement notwithstanding other issues that have yet to be adjudicated.

Legal Analysis:

DGCL Section 145 governs the advancement issues in this case. The court observed the truism that a corporation has discretionary authority to provide indemnification under subsections (a) and (b), as well as advancement under subsection (e), but must provide indemnification in certain circumstances pursuant to subsection (c).

Section 145(f) makes clear that the indemnification and advancement rights under the DGCL are not exclusive of any additional indemnification and advancement rights a corporation chooses to provide in a separate instrument. The court cited to other recent decisions in which the court recognized that there could be several separate and independent sources of advancement. See Marino v. Patriot Rail Company, 131 A.3d 325, 332 (Del. Ch. 2016), highlighted on these pages here, as well as Charney v. American Apparel, Inc., 2015 WL 5313769 (Del. Ch. Sept. 11, 2015), highlighted on these pages here. Charney stands for the proposition that unavailability of advancement under one source of rights does not foreclose the possibility of advancement under another.

Exception to Rule that Multiple Contracts Construed Together

The court addressed the principle that when multiple contracts are signed together as part of a single transaction, those contracts are often interpreted together, apart from any explicit incorporation by reference. Namely:

“The principle that all writings which are part of the same transaction are interpreted together also finds application in the situation where incorporation by reference of another document may be inferred from the context in which the documents in question were executed,” in the absence of any contrary intention. See Slip Op. at 29 and n.77 (citing 11 Williston on Contracts § 30:26 (4th ed. 1999)).

Notwithstanding the foregoing principle, the court emphasized the exception to the rule which is “in the absence of evidence to the contrary,” which applies in this case. Compare a very recent advancement decision in Aleynikov v. The Goldman Sachs Group, Inc., highlighted on these pages, in which the Court of Chancery discussed the doctrine of in pari materia, in connection with reading the separate bylaws of a parent company and its subsidiary in a consistent manner.

After reciting the basic principles of contract interpretation, the court held that under the circumstances present, the bylaws and the separate indemnification agreement were independent sources of advancement rights. The court found that based on the testimony and evidence at trial, that the plaintiff-director served at the request of the person who was the controlling stockholder, chairman and CEO – – which the court viewed as tantamount to a request by the corporation. That controlling stockholder, chairman and CEO had apparent and actual authority to direct employees and to bind the company. Therefore, that fact satisfied the requirement in the bylaws that the company request plaintiff-director to serve in his capacity.

A Determination on Exact Amount of Fees:

The court expressed the view oftentimes repeated in recent advancement decisions that a proceeding to determine the right to advancement is not the appropriate time to dispute the precise amount of fees, and that in an advancement proceeding, the court will not inject itself as a “monthly monitor of the precision and integrity of advancement requests.” See footnote 93.

In addition, the court was satisfied that plaintiff-director’s counsel segregated as best as possible the unrecoverable fees from his affirmative claims in New York as compared to the defense of the counterclaims which were subject to advancement.

Procedure for Payments Going Forward:

The court imposed an order requiring that the parties follow the framework and procedures for monthly requests for fees, and any disputes of same, detailed by the court in the case of Danenberg v. Fitracks, Inc., 58 A.3d 991, 1003-04 (Del. Ch. 2012).