An associate in the Delaware office of Eckert Seamans prepared this overview.
The Court of Chancery recently granted advancement of fees in Harrison v. Quivus Sys., Inc., C.A. No. 12084-VCMR (Del. Ch. Aug. 5, 2016) (TRANSCRIPT), based on the more flexible language of the Delaware LLC Act as compared with the more rigid structure of the Delaware General Corporation Law.
Background: Plaintiff John E. Harrison formed a joint venture with Prince Bander Bin Adbulla Bin Mohammed Al-Saud of Saudi Arabia in 2007. The name of the entity was Quivus Systems, Inc. (“Quivus”). Quivus was formed under the Delaware LLC Act and included advancement rights to members or managers of the company (and their heirs, estate, personal representative, or administrators) to the fullest extent allowed under Delaware law.
After the business relationship between Harrison and Prince Bander broke down, Harrison was removed from his position as CEO in 2014. One year later, Prince Bander filed a lawsuit against Harrison in Washington, D.C., alleging claims of mismanagement, incompetence, and corporate malfeasance while Harrison was serving as the CEO. Harrison sent a letter to Quivus demanding advancement of fees to defend the charges against him and Quivus refused. Harrison then filed this action in the Delaware Court of Chancery.
Analysis: The court began its analysis by observing that this case was not a normal, run-of-the-mill advancement action because it was being brought under the more flexible Delaware LLC Act and not under § 145 of the Delaware General Corporation Law. The significant difference between the two statutes is that advancement under the DGCL normally hinges on whether the defendant is being sued “by reason of the fact” that he took action in his official corporate capacity. Under the Delaware LLC Act, however, advancement and indemnification is available for “any and all claims and demands whatsoever.”
Defendants asserted that notwithstanding this broad language, Harrison did not have advancement rights because he was sued a year after being removed as the CEO. The court rejected that argument because it stated, “If nothing else, Harrison was a present manager when he was CEO of the company and when the events underlying the . . . action occurred.”
The court also found that the defendants’ interpretation improperly ignored the advancement clause’s language that future managers are owed rights. The court found that this rejected logic of the company was reminiscent of the movie Spaceballs, in that the company argued Harrison “could be a present manager in the past, but not in the present,” for the purpose of advancement. The court also reiterated Delaware’s public policy of respecting advancement rights to encourage qualified persons to serve as corporate directors without the ever-present threat of having to fund a lawsuit to defend themselves.
Finally, the court held that in light of Harrison’s success, he was entitled to attorneys’ fees on top of his advancement fees, more commonly known as fees on fees.