A recent decision from the Delaware Court of Chancery provides another reminder of the difficulty in defending against a claim for advancement of fees and expenses by former officers and directors. Specifically, the opinion in Davis v. EMSI Holding Company, C.A. No. 12854-VCS (Del. Ch. May 3, 2017), is the latest in a long line of cases that rejects the argument that advancement should be denied because a former officer and director was not sued “by reason of the fact” that he was a former officer and director. This case is an example of how rarely that requirement for advancement is found lacking. Cf. two recent exceptions to the vast majority of decisions on this point in the Charney and Leiberman cases, highlighted on these pages.
These highlights from the decision in the Davis case are for advanced readers of advancement law in Delaware and will focus on the most distinguishing characteristics of this opinion. The three failed defenses involved the interpretation of the provisions of a stock purchase agreement (SPA) which had an indemnification clause which it was unsuccessfully argued included a waiver.
Another failed argument was that the claims for advancement were not preserved under the SPA. Those two fact-specific arguments are somewhat sui generis and not likely to be applicable to many other cases.
But the third and most important failed defense was that the former officers were not entitled to advancement because the claims in the underlying action did not satisfy the prerequisite for advancement that they were brought “by reason of the fact” that the claimants were former officers and directors.
Key Bullet Points Most Applicable to the Majority of Advancement Cases
- The court explained the limitations of the often misunderstood opinion in Cochran v. Stifel Financial Corp., 2000 WL 1847676 (Del. Ch. Dec. 13, 2000), aff’d in relevant part, 809 A.2d 555 (Del. 2002). In that case, the court concluded that a corporate officer was not entitled to indemnification on a claim that he failed to repay a promissory note because the suit was not brought against the officer in his “official capacity” or by reason of the fact that he was an officer of the company.
- The court explained that the attempts by the company in this case “to invoke Cochran as a means to avoid its advancement obligation is just the latest example of a corporate defendant attempting to broaden that decision beyond its intended reach and beyond its own rationale.” See footnotes 36 and 37. See also footnote 43.
- In order for the narrow reasoning in Cochran to apply to defeat an advancement claim, the claim at issue must have “clearly involved a specific and limited contractual obligation without any nexus or causal connection to official duties.” See footnote 66. By contrast, if a claim for breach of fiduciary duty might also be an overlapping breach of an agreement, that will not be a failure of the requisite nexus of “official capacity.”
- In addition, the court rejected a “hyper-technical” defense based on “undue formalism” to the extent that there was a complete rejection of the advancement claim–when it was initially presented to the company–which would have made the request for a specific amount of fees unproductive. That is, if there is a complete rejection of any acknowledgement to a right for advancement, then it will not be a defense that a specific amount of fees was not requested