For those of us who follow the decisions of the Delaware courts on the right to advancement of fees for officers, directors and others who have been sued in their official capacity, a recent decision within the past week or so from the Delaware Court of Chancery should be of interest. In Thompson v. Orix USA Corp., C.A. No. 11746-CB (Del. Ch. June 3, 2016), the court determined that a former CEO was entitled to advancement rights even though he was not named as a party in the underlying lawsuit.
Most arguments opposing advancement fail when they challenge the satisfaction of the requirement that the underlying suit was brought “by reason of the fact” that the claimant was sued in their corporate capacity, but the charter of Orix USA, one of the two entities involved, provided advancement not only for officers and directors, but also for employees who were sued “by reason of the fact” of that status. This is an unusually broad provision that made it easy for the court to avoid the more common issue of whether the claims being made were based on status of the claimant as an officer or director. The court found that the misappropriated information, which was alleged to have been taken in the underlying action, was accessible to all employees and, therefore, it was not necessary to establish that the corporate powers of an officer and director were used to misappropriate that information.
The applicable language in the charter that provided for advancement also made it easy to argue that it was not necessary that the former directors and employees be named parties in the underlying lawsuit because the charter only required that they be “involved in” litigation even if they were not named as a party. The court found that there was a sufficient basis to establish that the claimants were incurring expenses in connection with depositions and document production that satisfied this requirement even if they were not named parties.
The specific language of the corporate charter involved, as well as a separate LLC agreement that provided relevant rights in light of claims related to that affiliated entity, were dispositive to the extent that they provided for broader rights than are typically allowed in most advancement disputes. These dispositive documents on which the rights were based allowed the court to distinguish several prior advancement decisions cited in footnotes 25, 26 and 30. For example, the court distinguished Paolino v. Mace because even though an employment agreement was involved in that decision, the causal nexus test used to interpret the “by reason of the fact” requirement, was still satisfied. The court reasoned that the requirement is satisfied where, as here: “a claim against a director or officer [or in the instant case, an employee], is for matters relating to the corporation . . . even if the individual is a party to an employment agreement.” This is meant to separate advancement claims from disputes only related to an employment agreement.
Also, because the plaintiffs were not parties to the litigation for which they sought advancement, they needed to allocate their expenses that they incurred as opposed to the expenses for the entity that was sued, and for which advancement expenses were not allowed.
The court also made a distinction between the language in the charter of one of the entities involved, which only required that a person “be involved in” a proceeding, with a separate LLC agreement. That separate agreement was also relevant because the plaintiffs were also claiming an entitlement to advancement under that LLC agreement which had a requirement that the person claiming advancement be either “threatened to be made a party”, or merely be one who was “threatened” with a lawsuit. The court found a sufficient basis to conclude that those requirements were met. The court also awarded fees on fees as is customary for those portions of the advancement claim that succeeded.