This post was prepared by Frank Reynolds, who has been following Delaware corporate law, and writing about it for various legal publications, for over 30 years.
A recent Court of Chancery opinion reversed an earlier advancement decision in favor of Heartland Payment System LLC ex-CEO Robert Carr after finding buyer Global Payments Inc.’s amended complaint narrowed its underlying suit against him to post-employment breach of non-compete contract claims, in Carr v. Global Payments Inc., et al., C.A. No. 2018-0565-SG, memorandum opinion (Del. Ch. Dec. 11, 2019).
Vice Chancellor Sam Glasscock III’s December 11 memorandum opinion granted Global’s motion to modify his October 31, ruling, which, he acknowledged, wrongly ordered the electronic payment processer to pay Carr’s legal bills based on his “substantial error of fact,” about the amended charges.
No longer pertains
After withdrawing that ruling on November 5 and agreeing to hear re-argument, he said in the December opinion that the amended complaint no longer “pertains” to Carr’s corporate officer status regarding the breach-of-contract charges and is now strictly an employer/employee matter.
He said the new complaint is not the result of “artful re-pleading” of the same alleged wrongs and now clearly sets out a new basis for breach-of-contract charges that steer clear of misuse of confidential information and actions taken before stepping down as CEO.
The advancement ruling is noteworthy because instead of focusing on the application of Section 145 of the Delaware General Corporation Law, it interpreted an advancement agreement patterned on Section 145 that was part of a limited liability company’s merger pact.
After Global bought Heartland in 2015 it had its new subsidiary file suit in federal court in New Jersey claiming Carr breached his fiduciary duty by giving his girlfriend inside information about the merger and used business secrets to form a competing company shortly after leaving.
When Carr sued in the Delaware Chancery Court in July 2018 to force Heartland to pay for his defense of those charges, the vice chancellor initially found he was entitled to advancement under the merger pact, but the underlying New Jersey action was stayed during a criminal investigation in Connecticut.
When the stay was lifted in May 2019, Heartland and Global filed an amended complaint in New Jersey that dropped the initial misuse of confidential information charge and focused on breach of the non-compete and non-solicitation aspects of Carr’s conduct after he left Heartland.
One month later, they moved to modify the vice chancellor’s advancement order with regard to the breach-of-contract charge, arguing that that claim arose solely from Carr’s actions when he was no longer a Heartland officer and director and thus ineligible for advancement.
Vice Chancellor Glasscock initially found in favor of Carr but after agreeing to hear re-argument, he said a re-examination of the amended charges caused him to find that they “moot the advancement dispute by removing any claims that would trigger an advancement right.”
Not mere relabeling
He said he came to that conclusion despite being “wary of artful attempts at…mere relabeling of claims” and keeping in mind that “any ambiguities in advancement cases are required to be resolved in favor of enforcing the advancement right.”
He noted that the merger agreement’s drafters promised advancement rights for litigation that “arises out of or pertains to” Carr’s corporate officer status; he decided that “arises out of” and “pertains” were equally broad in scope, but “pertains” had the force of “part of” or “related to”.
Therefore, the suit’s remaining breach of duty and fraud charges warrant advancement because they pertain to his CEO duties the parties agreed, but Global argued that claims for breach of a non-compete agreement are by nature an employer/employee dispute and thus not indemnifiable.
The vice chancellor said Delaware case law says such litigation involving post-separation use of confidential information gained while still in a corporate position “pertains” to his officer status and qualifies for advancement–but he said without that misuse, it would not, citing Brown v. LiveOps, 903 A.2d 324 (Del. Ch. 2006).
The first amended complaint clearly does not qualify for advancement because it “effectively erases all mention of confidentiality from the breach of contract claim…and focuses solely on his post-employment competition and solicitation activity,” he said, granting the motion to modify the advancement order.