For those of us who follow the latest developments in the law of advancement claims for directors and officers, a recent transcript ruling should be of interest, due to circumstances not often addressed in advancement decisions that we have highlighted on these pages for the last decade. Courtesy of Kyle Wagner Compton of The Chancery Daily fame, we bring you highlights of a recent decision in the pending case of Eric Pulier v. Computer Sciences Corp., et al., C.A. No. 12005-CB, hearing (Del. Ch. May 12, 2016), heavily borrowing from the unparalleled reporting of TCD‘s indispensable coverage of all things Chancery, as I have not yet obtained the transcript. Based on what I have seen so far, this may warrant inclusion in my annual ABA book chapter in which I note key decisions on advancement and indemnification. A key issue addressed in this case was whether the claimant was an officer as that term is defined in the applicable bylaws.
TCD alerted us to the following highlights, which are in large part from Kyle Wagner Compton of TCD (though any errors are my own).
The issue was not the usual argument about whether the former officer was acting in a corporate capacity, but instead: whether plaintiff is in fact a “covered” or “indemnified” person subject to advancement and indemnification under defendant’s bylaws. The analysis depended in part on Nevada law, because defendant is a Nevada corporation, and in part on the wording of defendant’s bylaws.
The claimant was the founder and CEO of the acquired company, called ServiceMesh, which defendant — Computer Sciences — acquired for a few hundred million. Plaintiff was kept on to manage his former company as a division of the acquiring company, essentially continuing his pre-existing CEO role, and given the title of Vice President. The plaintiff was not elected by the board of directors, and thus not entitled to advancement and indemnification under Computer Sciences’ bylaws. The acquiring company sued plaintiff for taking actions as a D&O of the acquired company before closing that weren’t discovered until after closing. There are two potential bases for advancement: the acquired company’s bylaws for acts taken in the capacity of D&O of the acquired company before closing, and defendant’s bylaws for acts taken in the capacity of Vice President after closing. Given the nature of his role, one might easily assume that one holding the title of Vice President would be considered an officer of the company. There is other evidence, such as his being identified as a member of Computer Sciences’ “executive team.” But Nevada law, which governed the application of the acquiring company’s bylaws, specifies that you can only be a corporate officer in a manner specified in the company’s bylaws, and Computer Sciences’ bylaws specify that officers must be elected by the board of directors.
Other claims, however, were governed by the former company’s bylaws which did not have that prerequisite of election by the board to qualify as an officer for purposes of advancement claims. The Chancellor concluded that five out of seven claims asserted against plaintiff related to acts taken as D&O of ServiceMesh, his prior company, and the court held that he was entitled to advancement for 80% of his expenses based on ServiceMesh’s bylaws. Based on the prerequisites of the bylaws of the acquiring company controlled by Nevada law, however, the court held that the plaintiff was not entitled to advancement for post-closing acts where his only basis for advancement was under the Computer Sciences’ bylaws.
Takeaway: This case exemplifies the risk of not being aware that notwithstanding being hired as a consequence of an acquisition of a company that one founded, assuming responsibility for the management of that business as a division of the acquirer, performing the same types of duties performed as CEO before the acquisition, with a title like Vice President that is at least nominally an officer-like title, it is still possible based on the terms of a bylaw or other controlling document, to not qualify as an “officer” for purposes of advancement. Thus, those officers and directors who remain in the service of an acquiring company, and the lawyers who advise them, need to be aware of this issue.
Also courtesy of The Chancery Daily are links to the bylaws involved in this case. Amended and Restated Bylaws of Computer Sciences Corp., Feb. 7, 2012 and Amended and Restated Bylaws of ServiceMesh, Inc., Nov. 14, 2011.
POSTSCRIPT: Coincidentally, a somewhat similar issue was addressed at a hearing recently in a separate case before another member of the Court of Chancery. In Aleynikov v. The Goldman Sachs Group, Inc., C.A. No 10636-VCL (Del. Ch. April 28, 2016), after a hearing, the court took under advisement an advancement issue certified to it by the U.S. District Court for the District of New Jersey. The issue turned on whether the person seeking advancement, who was given the title of Vice President by Goldman Sachs, was an “officer” as that term was defined for purposes of being entitled to advancement pursuant to the applicable governing documents. The recent Chancery hearing was the latest iteration of long-running litigation involving several courts in several states, as reported in Law360 in an article on April 28, 2016. We will be watching closely for the court to render its published opinion in this case, and we will be certain to provide highlights.