In Happ v. Corning, Inc., the U.S. Court of the Appeals for the First Circuit, read opinion here, recently applied Delaware law and interpreted DGCL Section 145, (Section 145 of the Delaware General Corporation Law found in Title 8 of the Delaware Code), to support the summary judgment finding that a director of a company was required to pay back the almost $1 million in legal fees that his company advanced in connection with a civil suit by the SEC. That suit resulted in a verdict that he engaged in insider trading (in the amount of about $40,000.) The director argued that the "undertaking" to pay back the advanced fees demanded by the company as a condition of advancement was signed "under duress" and that it went beyond the undertaking requirement of Section 145. The U.S. Court of Appeals for the First Circuit, applying Delaware law, disagreed with the argument. The court reasoned that even if the exact language of 145 was used, it is doubtful that the judgment of insider trading could be consistent with either the "good faith" and/or the "best interests of the company" provisions of 145. Compare generally, DGCL Section 102(b)(7) which allows a provision in a certificate of incorporation that prohibits recovery of monetary damages from directors for a shareholder claim that is exclusively based on a violation of the duty of care. It is in the nature of an affirmative defense and it is the burden of the directors to demonstrate that they are entitled to such a charter provision. It does not, however, prevent injunctive relief from being awarded. See, Malpiede, 780 A.2d at 1095; see generally, In re Walt Disney Company Derivative Litigation, 907 A.2d. 693 (Del. Ch. 2005).
This Happ case involves the less than common situation where there is a court opinion finding that a company’s advancement must be paid back. Most of the case law in Delaware recently on this topic is a clarification of the company’s obligation to make the advancement, where applicable. This is a good example of why a party needs advancement, as most people cannot wait until the case is over to finance almost $1 million in legal fees, and then wait for post-trial indemnification (if warranted). It is not clear whether the officer in this case has the wherewithal to make the repayment, however, which highlights the company’s conundrum. The Court of Appeals reasoned that the director should have filed a declaratory judgment action if he thought the undertaking was made under duress and/or was beyond that required by Section 145. ( I will not give in to the temptation to describe the unsuccessful plaintiff in this case as hapless.)