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.
The Court of Chancery recently refused to reconsider its decision that, pending resolution of a challenge to the validity of their indemnification agreements, Stimwave Technologies Inc. must advance defense costs to a CEO and a director in actions by the company and the U.S. Department of Justice. Stimwave Technologies Incorporated v. Perryman, et al., C.A. No. 2019-1003-SG (Del. Ch. May 13, 2020).
Vice Chancellor Sam Glasscock’s May 13 letter-to-counsel opinion denied Stimwave’s motion to reargue his April 1 bench ruling after rejecting the medical device developer’s contention that his order to advance expenses effectively granted mandatory relief without a trial when key facts were in dispute.
The Vice Chancellor said he granted preliminary injunctive relief because of “the summary nature of, and the public policy undergirding, advancement actions” where the Court “has long recognized that a delay in recognizing advancement rights may ultimately render those rights illusory.”
The short decision is yet another example of the Court’s reluctance to let companies inject novel objections to established advancement provisions to hold up reimbursement of defense funds to eligible officers and directors in actions relating to their corporate positions.
According to its website, Stimwave is a Delaware-chartered medical technology company founded by former CEO Laura Perryman in Pompano Beach, Florida, that markets an electronic pain relief device. In April 2018, its board adopted, and the stockholders ratified, an indemnification agreement that she would supposedly be able to immediately offer to the directors and officers.
But one year later, Stimwave had undergone management changes and filed suit against Laura and Gary Perryman in an underlying action in Chancery. When she and fellow director Gary Perryman sought legal fee reimbursement for that suit and an investigation by the U.S. Department of Justice, the request was denied. Stimwave Technologies Incorporated v. Laura Tyler Perryman, et al., C.A. No. 2019-1003-SG, complaint filed (Del. Ch. Feb. 11, 2020).
They filed a complaint for advancement, with a motion to expedite and request for temporary restraining order February 11, 2020, claiming Stimwave violated their valid agreements.
The Vice Chancellor on February 20 granted their motion to expedite, but denied their TRO motion, and instructed the parties to proceed to a judgment on the pleadings. Then on April 1, from the bench, he denied their motion for judgment on the pleadings but converted it into a motion for interim relief, which he granted.
When Stimwave sought reargument — arguing that the decision violated the fundamental precept that mandatory injunctive relief be ordered only after trial or on facts not legitimately in dispute, citing C & J Energy Servs., Inc. v. City of Miami Gen. Emps.’ & Sanitation Emps.’ Ret. Tr., 107 A.3d 1049, 1071–73 (Del. 2014). But the Court said it appeared that Stimwave’s board validly adopted the indemnification bylaw in April 2018 and the shareholders ratified it days later.
That, coupled with (a) the Perrymans’ apparent promise to repay the advanced funds if the court found them not to be entitled to advancement and (b) the bylaw’s wording that, the court found, likely referred to current officials that included the Perrymans, seemed on its face, to favor the petitioners here, the court said.
But Stimwave maintained that the wording actually only applied to an earlier designated director and not the Perryman petitioners apparently due to a problem with the timing of the board’s adoption, the stockholder ratification and when the CEO conferred the indemnification.
The vice chancellor said on its face, the indemnification more likely applied to the then-current officers and directors. He found that under the circumstances, since the Perrymans had apparently made the required commitment to repay the advance funds if they were for any reason not entitled to them, the court’s practice was to require payment until the validity of the pacts was resolved.
“Litigating a defense attacking the validity of a contract for advancement before providing advancement might leave the petitioners unable to effectively vindicate their contractual advancement rights, assuming they exist, as well as to defend the underlying substantive action and investigation, threatening imminent irreparable harm,” the opinion said
However, he limited the advancement order to legal costs incurred from the date of the opinion forward, excluding legal fees the Perrymans had already incurred in responding to the DOJ’s investigation.
The vice chancellor reasoned in support of his holding that: “the unusual procedural posture of this matter, the nature of the respondent’s defense that the indemnification agreements are void, and the fact that the forgoing defense will be addressed promptly,” and because the petitioners could seek to recover those amounts once the validity of the indemnification agreements is resolved.