In a rare denial of a claim for advancement, the Delaware Court of Chancery in the opinion styled Charney v. American Apparel, Inc., C.A. No. 11098-CB (Del. Ch., Sept. 11, 2015), rejected the claims by a former chairman and CEO (and founder), based on the provisions for advancement in the company’s charter and in an indemnification agreement.
Why this Case is Noteworthy
Although generally speaking it has been rare, at least in the past few years, for a Chancery decision to deny a claim for advancement, this is the second decision in as many weeks that has denied such a claim. In the decision last week, highlighted on these pages here, another unrelated Chancery decision also denied an advancement claim that arose after the term of office of the former officer had been terminated. [The Chancery Daily, an exemplary publication that tracks Chancery cases in more detail than any other, also grappled with a description of what would otherwise be a rare event, compared with cases over the last few years–except for the occurrence twice in two weeks.]
This opinion involves a familiar fact pattern that includes a founder and former CEO/chairman who is forced out of the company, and then seeks advancement. The claims in this case arose after the term of the CEO had ended. Similar to claims for advancement that have been denied in other cases based on a dispute regarding the former officer’s employment agreement, this dispute arose out of a separate agreement that addressed conduct occurring after the position of the former director and CEO had ended.
The highlights of this decision that would be applicable to the widest range of readers interested in this type of corporate litigation, include the following: First, in order to understand this decision, a few key facts need to be considered. The specific provisions interpreted by the court in this case included different criteria for benefits afforded to current as opposed to former directors and officers. Moreover, the coverage provided to former directors and officers was not coterminous with the advancement provisions that apply to current directors and officers. Whether or not that was a drafting error or an intentional exclusion, it was nonetheless fatal to the claim by the former founder and CEO/chairman in this case.
The foregoing interpretation was buttressed by the terms of DGCL § 145(e) which also makes an important distinction between current and former officers, and allows a corporation more latitude to provide advancement to current officers, but allows more conditions to be imposed on the benefit granted to former directors and officers. See Slip op. at 14-16.
DGCL § 145(f) allows a separate agreement to be the basis for advancement but nonetheless, the indemnification agreement and the provisions of advancement in this case failed to provide coverage for advancement.
The court conducted an extensive discussion of the condition that the suit against the officer be filed “by reason of the fact” of his official position, and found that the claimant might otherwise satisfy that prerequisite, but based on the facts of this case the court found that the claims arose after the term of the plaintiff as an officer and director had concluded. See footnote 42.
Key Takeaway: As noted in the Chancery decision of Sept. 5, 2015, highlighted on these pages and linked above, the following important principle in this case needs to be remembered for those interested in this aspect of Delaware corporate law: notwithstanding the allowance under DGCL § 145(f) for contract-based advancement rights, the advancement right granted in that contract will be limited by the requirement that it not exceed the boundaries of–and that it satisfy the minimum standards imposed by–DGCL § 145(a) and § 145(b).