Narayanan v. Sutherland Global Holdings Inc., C.A. No. 11757-VCMR (Del. Ch. July 5, 2016). This Delaware Court of Chancery opinion addressed: (1) Whether separate sources of indemnification, including the company’s bylaws and an indemnification agreement, must be read together or separately; (2) Whether the plaintiff-director served the entity at the request of the company or for his own personal benefit; and (3) Whether the court should delay granting the request for fees, and fees-on-fees, until after the court determines that the company is liable for those fees. Each of the issues was decided in favor of the plaintiff-director.
Although Delaware entities were involved, many of the activities giving rise to this case occurred in India. One of the developments that precipitated the litigation by the plaintiff-director, is that upon his retirement, the company did not honor its alleged obligation to buy his shares. The plaintiff-director took legal action to obtain payment for his shares. The initial action was filed in federal court in New York and the Company filed counterclaims. The Company also filed a criminal complaint against the plaintiff-director in India alleging breach of duties.
Basis for Advancement:
The three instruments on which the claims for advancement are based are: (1) The certificate of incorporation; (2) bylaws, and (3) indemnification agreement. After making a demand and attaching an undertaking, the complaint in this matter was filed on November 30, 2015. It is noteworthy that the trial was held within 70-days after the complaint was filed, and this 44-page opinion was issued promptly thereafter.
(1) The court held that the bylaws are a separate and independent source of indemnification and advancement that do not require cooperation even though other documents might have that as a condition; (2) The controller of the company requested that the plaintiff-director serve in both entities involved in this matter and that satisfied any prerequisites for advancement; and (3) There is no further reason to delay vindicating the right to advancement notwithstanding other issues that have yet to be adjudicated.
DGCL Section 145 governs the advancement issues in this case. The court observed the truism that a corporation has discretionary authority to provide indemnification under subsections (a) and (b), as well as advancement under subsection (e), but must provide indemnification in certain circumstances pursuant to subsection (c).
Section 145(f) makes clear that the indemnification and advancement rights under the DGCL are not exclusive of any additional indemnification and advancement rights a corporation chooses to provide in a separate instrument. The court cited to other recent decisions in which the court recognized that there could be several separate and independent sources of advancement. See Marino v. Patriot Rail Company, 131 A.3d 325, 332 (Del. Ch. 2016), highlighted on these pages here, as well as Charney v. American Apparel, Inc., 2015 WL 5313769 (Del. Ch. Sept. 11, 2015), highlighted on these pages here. Charney stands for the proposition that unavailability of advancement under one source of rights does not foreclose the possibility of advancement under another.
Exception to Rule that Multiple Contracts Construed Together
The court addressed the principle that when multiple contracts are signed together as part of a single transaction, those contracts are often interpreted together, apart from any explicit incorporation by reference. Namely:
“The principle that all writings which are part of the same transaction are interpreted together also finds application in the situation where incorporation by reference of another document may be inferred from the context in which the documents in question were executed,” in the absence of any contrary intention. See Slip Op. at 29 and n.77 (citing 11 Williston on Contracts § 30:26 (4th ed. 1999)).
Notwithstanding the foregoing principle, the court emphasized the exception to the rule which is “in the absence of evidence to the contrary,” which applies in this case. Compare a very recent advancement decision in Aleynikov v. The Goldman Sachs Group, Inc., highlighted on these pages, in which the Court of Chancery discussed the doctrine of in pari materia, in connection with reading the separate bylaws of a parent company and its subsidiary in a consistent manner.
After reciting the basic principles of contract interpretation, the court held that under the circumstances present, the bylaws and the separate indemnification agreement were independent sources of advancement rights. The court found that based on the testimony and evidence at trial, that the plaintiff-director served at the request of the person who was the controlling stockholder, chairman and CEO – – which the court viewed as tantamount to a request by the corporation. That controlling stockholder, chairman and CEO had apparent and actual authority to direct employees and to bind the company. Therefore, that fact satisfied the requirement in the bylaws that the company request plaintiff-director to serve in his capacity.
A Determination on Exact Amount of Fees:
The court expressed the view oftentimes repeated in recent advancement decisions that a proceeding to determine the right to advancement is not the appropriate time to dispute the precise amount of fees, and that in an advancement proceeding, the court will not inject itself as a “monthly monitor of the precision and integrity of advancement requests.” See footnote 93.
In addition, the court was satisfied that plaintiff-director’s counsel segregated as best as possible the unrecoverable fees from his affirmative claims in New York as compared to the defense of the counterclaims which were subject to advancement.
Procedure for Payments Going Forward:
The court imposed an order requiring that the parties follow the framework and procedures for monthly requests for fees, and any disputes of same, detailed by the court in the case of Danenberg v. Fitracks, Inc., 58 A.3d 991, 1003-04 (Del. Ch. 2012).