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 Chancery Court recently denied as premature Stimwave Technologies Inc.’s motion to recoup $1.2 million in legal fees it had allegedly been tricked into advancing to its ex-CEO in defense of the medical device maker’s breach-of-duty charges against her and her director husband in Perryman et al. v. Stimwave Technologies Inc. No. 2020-0079-SG, opinion issued (Del. Ch. April 15, 2021).
Vice Chancellor Sam Glasscock’s April 15 letter-to-counsel opinion found that although Laura and Gary Perryman signed a joint agreement to repay any advancement that a court decided they didn’t deserve, and Vice Chancellor Glasscock had previously found Laura likely forged her advancement contract, that did not entitle Stimwave to recoup funds from joint marital assets or offset deserved payments to Gary.
The decisions should be of interest to attorneys involved with start-up companies which are often begun and run by families who may offer investors unique roles in corporate governance in return for financing.
Vice Chancellor Glasscock’s Dec. 9, 2020 decision had 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. Perryman et al. v. Stimwave Technologies Inc. No. 2020-0079-SG, memorandum opinion issued (Del. Ch. Dec. 9, 2020).
He found that Laura apparently doctored her agreement to make it look like it predated the charter change, falsely clearing her for advancement. That prompted Stimwave’s recoupment motion.
The vice chancellor said his April 15 decision on the rare recoupment issue was guided by the Delaware Supreme Court’s seminal opinion in Kaung v. Cole Nat. Corp., 884 A.2d 500, 509 (Del. 2005) — which found that recoupment for fees improperly advanced is premature if brought before the indemnification liability is determined, and that is the case here.
Laura Perryman was a founder and CE0 of the Tucson-based marketer of wireless micro size injectable medical devices from when it was re-chartered in Delaware in 2010 until November 2019 when she was asked to step down amid a Department of Justice investigation.
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.
The decision on recoupment
The court said both Stimwave’s entitlement to and practical ability to obtain disgorgement are “fraught with difficulty” since Laura has no real estate and less than $50,000 in liquid assets rendering her apparently unable to repay and Stimwave has no right to access Gary’s assets, or to offset advancement in this context.
“Delaware has, ever since 1852, repudiated the doctrine of coverture,” he noted. “Since that time—a decade, I note, before the Civil War—this Court has recognized women as juridical persons, full citizens with property rights separate from those of their husbands.”
And allowing a set-off of debt owed to an entity, even one owed directly by an indemnitee, against his advancement rights “is unwarranted and would defeat the purpose of advancement, which is to provide individuals with an incentive to provide corporate services and allow them to defend a claim that they may not be able to fund themselves, pending indemnification,” the vice chancellor ruled.
Finally, the entire issue of recoupment is premature because, “the question of indemnification has not yet been litigated, much less determined, and whether Stimwave may recoup its improperly advanced fees will depend on that determination,” he said in denying the motion without prejudice.