Chancery Denied Advancement Claim as Within Board’s Discretion

Miller v. Palladium Industries, Inc., C.A. No. 7475-VCN (Del. Ch. Dec. 31, 2012).

Issue Addressed: This case addressed the issue of advancement of legal fees pursuant to Section 145(e) of the Delaware General Corporation Law.

Brief Overview

The Court denied a motion for judgment on the pleadings based on a claim for advancement in light of bylaw provisions that “at first glance” seemed to make the advancement provision mandatory, but later in the same paragraph gave the board the option to decide in its discretion not to grant advancement.  The Court interpreted that qualification as making the right to advancement optional at the discretion of the board.

This case involved a company called VisionAid, Inc. suing its CEO, who also served as a director, for breach of fiduciary duty, as well as misappropriation, waste and conversion.

That CEO and director, Miller, sued for advancement pursuant to provisions in the bylaws.  The provisions in the bylaws provide that advancement shall be paid “unless otherwise determined by the board of directors . . .”  Thus, there appears initially to be mandatory advancement but in the same sentence, it is qualified by the discretion of the board.  The question was whether that qualification made the advancement purely discretionary. The Court was guided by basic contract interpretation principles.

Legal Analysis

The Court explained that DGCL Section 145(e) allows for, but does not require, advancement.  Although a company may provide for mandatory advancement, either in its bylaws or by contract, it is not required to do so.  See footnotes 15 and 16.

Delaware policy favors indemnification and advancement as a method of attracting qualified individuals to serve in important capacities, and that policy supports the approach of resolving ambiguity in favor of indemnification and advancement.  See footnote 17.  However, the Court emphasized that:  “absent a bylaw or contractual provision that makes advancement mandatory, Delaware law leaves the decision to advance expenses to the business judgment of the board.”  See footnote 18.

The Court reasoned that the only reasonable interpretation of the advancement provision in this case is that the board had the option of not providing for advancement, assuming it rejected a request for advancement within a reasonable time.  See footnote 19 and accompanying text.

The Court distinguished the case of Stockman v. Heartland Industrial Partners LP, 2009 WL 2096213 (Del. Ch. July 14, 2009), which dealt with a provision that made advancement subject to the review by a general partner of the mere form of a request as opposed to granting the general partner total discretion to withhold advancement entirely.

UPDATE: On July 19, 2013, the Supreme Court affirmed this decision by Order.