Holley v. Nipro Diagnostics, Inc., C.A. No. 9679-VCN (Del. Ch. Dec. 23, 2014). This Delaware Court of Chancery decision addresses nuanced aspects of advancement and indemnification pursuant to DGCL section 145, regarding a request for the payment by the company of attorneys’ fees incurred by directors and officers who are sued in their official corporate capacity. This opinion clarifies Delaware law on some concepts that may be counterintuitive.
The court begins this 34-page opinion with what I will paraphrase as “here we go again” with a tinge of possible exasperation to the extent that a company is challenging its obligation to advance fees incurred by a former director. The author of this post (along with others in his firm) represented the company in this case so I will try to be objective in highlighting a few bullet points about those parts of the opinion that might be of widespread applicability for those engaged in this type of corporate litigation (without expressing my view about whether I agree with the result).
- Although the first-filed [McWane] doctrine is generally applicable to summary proceedings such as this, the court must weigh the McWane comity factors with the need for expeditious resolution of summary proceedings.
- The requirement that in order for advancement to be available, the underlying suit against the director must have been “by reason of the fact” of his corporate position, can be determined (at least in this case) as a matter of law on a motion for partial summary judgment.
- Even if an insider trading claim does not involve any official corporate actions or personal profit by a director, it may still satisfy the prerequisite of “by reason of the fact” for purposes of an advancement action.
- Even if a director pleads guilty to insider trading, and the agreement granting indemnification excludes coverage for insider trading (in a carve-out), advancement may still be granted, especially if the carve-out may be read to limit indemnification for some claims but not clearly limiting advancement for those same claims.
- This is so because there is no clear bar to advancement in Delaware even if indemnification is theoretically impossible for the same claims for which advancement is sought. See footnote 40 and accompanying text.
- The requisite undertaking that must precede advancement does not need to be renewed or repeated at every stage of related proceedings even if they began with an investigation instead of litigation.
- Although the DGCL does not require advancement, if advancement is provided but the agreement providing it attempts to unduly restrict coverage of certain claims, it may impermissibly conflict with the DGCL.
- Even those who plead guilty, and admitted that they did not act in the best interests of the company, may under some circumstances be eligible for indemnification, and therefore pleading guilty per se will not bar advancement nor would it be contrary to public policy to provide advancement to someone who pled guilty to the same claims for which he seeks advancement (if I understand this decision correctly based on the facts of this case.)
- The court noted at page 32 of the slip opinion that Section 145(a) has a good faith requirement for indemnification (not advancement) if a director, for example, is convicted (which is not a per se disqualification), but Section 145(c) has no such prerequisite, in connection with indemnification for a director or officer who has been “successful or otherwise” in defending a claim.
Postscript: As the Chair of the Indemnification Subcommittee of the ABA Business and Corporate Litigation Committee of the ABA Business Law Section, I am the co-author (with colleagues at my firm, Gary Lipkin and Aimee Czachorowski), of a book chapter that highlights all the key cases around the country on indemnification and advancement of directors and officers, for an annual ABA publication entitled: Recent Developments in Business and Corporate Litigation (2 volumes). I submitted the draft of the chapter a few weeks ago for the 2015 edition, so if I decide that this case is important enough to include in that chapter, it may need to wait for next year’s edition.