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 Delaware Court of Chancery recently ruled that Stimwave Technologies Inc. need not advance legal costs for its suit against its ex-CEO because she apparently doctored her indemnification agreement to falsely pre-date a charter amendment requiring officers to get a major investor group’s approval of their advancement rights in Perryman et al. v. Stimwave Technologies Inc., No. 2020-0079-SG, memorandum opinion issued (Del. Ch. Dec. 9, 2020).
Vice Chancellor Sam Glasscock’s December 9 opinion declined to order advancement for ex-CEO Laura Perryman based on his credibility issues with her testimony and documents, but he endorsed the advancement rights of her husband, director Garry Perryman, whom he found likely lacked skill to manipulate the truth or the metadata that identified his indemnification agreement.
The decision turned on the novel issue of whether the ex-CEO and director had complied with an STI charter change that purportedly gave investors in the company’s Series D Preferred stock, voting as a separate stock class, power to nullify a director or officer’s transactions, including indemnification pacts and advancement for their actions.
“Neither the bylaws nor the charter precludes the company from granting to an investor a veto right over extension of advancement benefits to its directors and officers,” the vice chancellor ruled. Therefore, “whether Laura’s IA is valid accordingly turns on when that document was executed, which in turn determines whether such document required approval from the Series D stockholders to be valid.”
Laura Perryman was a founder and CE0 of the Tucson-based marketer of wireless micro size injectable medical devices from when it was chartered in Delaware in 2010 until November 2019 when she was asked to step down amid a Department of Justice investigation.
According to the opinion, Laura sent the STI board an email the next day with an attachment that she identified as her indemnification agreement dated January 1, 2018 and based on that document, the board agreed to pay for her attorney bills for the investigation.
But the next month, STI filed its own complaint against its ex-CEO claiming she breached her fiduciary duties by directing employees to alter bills to falsely make it appear they had been paid and later added a charge that she misused company funds to pay her son’s apartment rent and bonuses to favored employees.
STI also included in the complaint what the vice chancellor found to be a “weak allegation” of breach of duty against Gary for “acting in concert” with his wife.
At a December 20 board meeting, a majority of the board concluded that the January 1, 2018 IA Laura submitted was not valid because it was actually created on November 11, 2019 —“after the DoJ’s civil investigative demand,” the opinion said.
The advancement action
Laura and Gary filed a February complaint and a petition for judgment on the pleadings to compel STI to provide indemnification and advancement. In opposition, STI argued that both of them filed their indemnification agreements after the 2018 charter change that required Series D stockholder approval but doctored the documents to make it appear that they were signed before the amendment, so they were void ab initio under that amendment.
Gary’s advancement right
As to Gary’s right to advancement, Vice Chancellor Glasscock noted that Gary was not an executive and thus did not need to get Series D approval. He found that even though the indemnification agreement that Gary submitted carried a date that did not jibe with his testimony, Gary had no motive for deception and was not very “engaged” in the discovery process or his role as a director.
The court found it most likely that Gary’s original IA was created before the amendment and is therefore valid.
Laura’s advancement right
STI’s document experts claimed they discovered Laura had merged her indemnification agreement with an earlier signature page and purported that its identification metadata applied to the agreement, but they said in truth, there was no metadata for her false agreement.
Vice Chancellor Glasscock found that Laura:
Has indemnification rights under the Charter, “but those may prove pyrrhic absent [advancement] funds to vindicate her legal rights”
Whether she was or was not a CEO when she signed her agreement, could not have a valid agreement if she lacked proof that it was signed before Stimwave’s July 17, 2018 charter amendment requiring Series D investor approval of benefit extension – which she did not seek.
Cannot argue that other parts of the charter always require indemnification and advancement.
“Came across as someone who had created a story to fit the facts, adjusted it as it became apparent that it would be advantageous to do so, and who was attempting to buttress that story by concocting details.”
Has failed to successfully challenge the contractual right of the company to give the Series D shareholders veto power over the extension of advancement
Could the opinion be seen as diverging from a long trend of Chancery Court decisions that have cast a skeptical eye on any firm’s attempt to add disqualifying conditions to the indemnification/advancement rights its charter had granted? Might the opinion encourage corporate law specialists to research more ways to attract investor groups by offering them expanded power to control executive transactions? And might the Chancery Court of the future be asked to rule on a new species of advancement disputes as a result?