Chancery Clarifies Requirement for Statutory Indemnification

Costantini v. Swiss Farm Stores Acquisition LLC, C.A. No. 8613-VCG (Del. Ch. Dec. 5, 2013).

Issue Addressed

Whether the agency relationship between the company and a person seeking indemnification rights was sufficient for purposes of the standard applicable for statutory indemnification.

Short Answer:  At the preliminary stage of a motion for judgment on the pleadings, there were too many factual issues to resolve the question.

Brief Overview

The prior Chancery decision in this case was previously highlighted on these pages here.  This letter opinion was in connection with a motion for reargument of that decision about whether Kahn, the person whose request for indemnification was denied in the earlier opinion, should be entitled to indemnification because, contrary to the court’s holding in the prior opinion, there was some agency relationship alleged between the company and  Kahn.  The Court said that there was insufficient information presented on that issue on a factual level – - until the motion for reargument was submitted.  In light of the motion for reargument and the additional information on that factual issue, the court, in sum, allowed for the issue to be further developed through discovery.

The parties chose to import language into their operating agreement from Section 145(a) and Section 145(b) of the DGCL, and therefore the Court used caselaw interpreting that provision for guidance.  The courts have explained that the provision in that statute provides for indemnification when an officer, director or agent of a company is sued “by reason of the fact” of the corporate position of that person.  That test is met when “there exists a causal connection or nexus between such proceeding and the defendant’s corporate capacity.”  See Homestore, Inc. v. Tafeen, 888 A.2d 204, 214 (Del. 2005).  The Court also explained that a “nexus” exists where a person’s “corporate powers are necessary or useful for committing the alleged misconduct.”  See footnote 17.

In this case, there was an issue about whether Kahn was an agent and whether that agency relationship had a nexus to the complaint brought against him in the underlying action.  Part of the factual dispute was whether or not he was a direct agent or subagent based on an entity through which he worked.  Assuming he was a subagent, there was a dispute about whether the entity was a corporation or, believe it or not, a sole proprietorship despite a corporate name.

In conclusion, the pleadings were insufficient at this early stage in order to make a determination, but the discussion by the Court regarding what is required to establish the necessary connection with a corporation that would make one eligible for indemnification, makes this short letter opinion necessary reading for those interested in this nuance of Delaware statutory indemnification law. Although the language interpreted was in an operating agreement, because the agreement incorporated the terms of the statutory provisions in Section 145, the Court used the statutory analysis.