In a recent Delaware Chancery opinion, the court clarified that a corporate officer who was “successful on the merits or otherwise in the defense of an action” need not show good faith in order to be entitled to mandatory indemnification. Meyers v. Quiz-Dia LLC, C.A. No. 9870-VCL (Del. Ch. June 6, 2017). See also DGCL Section 145(c).
Key Aspects of the Decision: Many cases highlighted on this blog have addressed the various permutations of indemnification and advancement for officers and directors, so this decision will be limited to the nuances that make this ruling noteworthy (and “blog-worthy”).
The court explained that when mandatory indemnification is provided to the fullest extent permitted by applicable law, that includes the fees incurred to investigate claims prior to a lawsuit. In particular, in this matter, former officers had reason to believe that they would be sued, and thus began an investigation of those potential claims in order to prepare their defense. Fees for that investigation are included in the indemnification rights to which they were entitled.
Although the indemnification provisions in this case were in the LLC context, because the language used in the LLC documents mirrored DGCL Section 145(c), the case law and statutory interpretation approach that construed that language was applicable.
The phrase in Section 145(c) that provides mandatory indemnification when a former director or officer has been “successful on the merits or otherwise in defense of any action . . ..”, has been interpreted very broadly to include almost anything short of a complete loss. It permits an indemnitee to be indemnified as a matter of right even if the success includes, for example, dismissal without prejudice of a federal action – – and the same claims are later asserted again in a state court action.
Notably, the good faith requirement does not apply under Section 145(c) to a director or an officer who is “successful” in defending a claim. See footnotes 39 and 40 and accompanying text.