The recent Delaware Court of Chancery opinion in Hyatt v. Al Jazeera American Holdings II, LLC, C.A. No. 11465-VCG (Del. Ch. March 31, 2016), is useful for those who need to be aware of the latest iteration of Delaware law on advancement of fees incurred by former officers and directors, which is one of the more common forms of corporate litigation. This is the latest in an ongoing series of rulings in Delaware involving a transaction in which the media company known as Al Jazeera, based in the Middle East, purchased a cable TV company in the U.S. which was owned at least in part by the former politician, Al Gore, as well as Joel Hyatt. Some of those decisions have been highlighted on these pages.
Introduction: The court begins the opinion with the apt description of many advancement cases being indicative of “Hirer’s Remorse”, to the extent that advancement is given to employees, officers and directors as an inducement for them to accept their positions for the benefit of a corporation, but afterwards when those corporations need to make payments pursuant to those advancement obligations, they often resist and try to find reasons not to pay.
Background. This case involves a twist on that typical pattern. Al Jazeera assumed the obligations of advancement from the company that it purchased. The underlying litigation began when Hyatt and Gore sued Al Jazeera to collect money that was placed in escrow after the transaction. Al Jazeera then counterclaimed against Hyatt and Gore contending that they breached provisions of the merger agreement based on certain alleged misrepresentations and related claims. It was undisputed that the initial claims in the suit filed by Hyatt and Gore were not covered by advancement. This case involved whether the counterclaims against Hyatt and Gore entitled them to advancement of their fees and expenses.
Key Facts: In large measure the case turned on whether the counterclaims against Hyatt and Gore were made against them in their capacities as former officers and directors. The court analyzes each of the counterclaims separately and found that most of them did assert allegations based on the actions of Gore and Hyatt as former officers and directors of the company. The analysis was based on the terms of the merger agreement which incorporated the advancement provisions in the LLC operating agreement.
Notably, the court found that fee shifting provision in the relevant agreement did not supersede the advancement obligation and that the shifting of fees provision was silent on the issue of advancement.
Useful Nuggets include the following:
“Although indemnification and advancement rights are closely related, each are ‘distinct types of legal rights,’ and the ‘right to advancement is not ordinarily dependent upon a determination that the party in question will ultimately be entitled to be indemnified.’” See footnotes 31 and 32. The foregoing statement perhaps encapsulates the counterintuitive nature of the concept of advancement and is the aspect that most commonly frustrates many corporations who find it difficult to advance fees and expenses when they are at least personally convinced that ultimately the former officer and director will not be entitled to indemnification.
Another nugget of legal insight in this case refers to the application of cases interpreting Section 145 of the Delaware General Corporation Law to advancement provisions in LLC operating agreements. Footnote 38 in the opinion and the accompanying text explain how the court often applies the reasoning in cases interpreting Section 145 to the interpretation of language in an LLC operating agreement or other agreements that often incorporate the same statutory advancement language verbatim from Section 145. In this case for example, the operating agreement conferred advancement on former officers and directors that incurred expenses “by reason of the fact” that the person was a former officer and a director. That language tracks the language in Section 145 of the DGCL. The court cites to other cases that have relied on Section 145 jurisprudence to interpret provisions in agreements that use the same or similar language as the statute.
The court referred to Section 18-108 of the Delaware LLC Act as giving broad authority to LLCs to provide indemnification by contract. Specifically, the court in this case found that the parties intended to import the “strictures” of Section 145 by using the same language in their agreement. The court also allowed for “fees on fees” which is a well-established principle to cover the costs of litigation to the extent that a party prevails in establishing the right to advancement, as in this case.