The Delaware Supreme Court explains in this short opinion the public policy supporting the expedited nature of advancement proceedings for officers and directors of corporations, and managers of LLCs. Trascent Mgmt. Consulting, LLC v. Bouri, No. 126, 2016, 2016 WL 6947014 (Del. Nov. 28, 2016).
Although the principles discussed in this opinion are not new, the result of the case is a predictable rejection of a defense to payment by an entity of advancement of fees incurred by former officers, directors and managers. This is an essential topic in corporate litigation for executives of companies and the lawyers who represent them. We include this decision on these pages, as it is the most recent Supreme Court pronouncement on an exceedingly important topic, and we cover on this blog the key decisions in the area. The most noteworthy aspect of this opinion is the court’s explanation of the public policy reasons in support of advancement and the need for prompt resolution of such claims in the Court of Chancery.
In this case, a former manager of an LLC sought advancement for fees incurred in connection with defending a claim by his former employer. His employment agreement and the LLC agreement both contained nearly identical language providing for the right to advancement. The company attempted to defeat the advancement claim by alleging that the manager who was seeking advancement procured his position by fraud and that the agreements providing for advancement were based on fraudulent inducement. The court acknowledged the Delaware LLC Act’s analogue to DGCL section 145.
The court found that the company’s defenses were based on plenary claims. This opinion affirmed the Court of Chancery’s decision to prevent such plenary claims from impeding the prompt resolution of the advancement claim for several reasons. First, whether the allegations of fraud were ultimately successful was an issue to address in connection with indemnification in a separate and subsequent proceeding. Whether indemnification was appropriate was not a defense to advancement in the interim. Second, the court explained that a party cannot escape an otherwise valid contractual provision by arguing that the underlying contract was fraudulently induced or invalid for some reason unrelated to that provision. In addition, the court emphasized that advancement proceedings are summary in nature, and Delaware courts do not countenance attempts to delay the proceedings by addressing plenary claims.