This post was prepared by Andrew J. Czerkawski, an associate in the Delaware office of Lewis Brisbois, who is scheduled to be sworn in to the Delaware Bar in December 2023
In Hoffman v. First Wave Biopharma, Inc., 2023 Del. Ch. LEXIS 378 (Del. Ch. Sep. 27, 2023), the Delaware Court of Chancery determined that board actions did not trigger a fellow director’s mandatory advancement right.
Background
Hoffman served on the board of directors of First Wave Biopharma, Inc. (the “Company”). After a soured acquisition, the target’s stockholder representative sued the Company. The resulting settlement discussions contemplated the Company paying the stockholder representative $1.5 million.
During the relevant period, the Company’s board discussed and decided to raise an additional $4 million, not planning to tell the public for some months. Yet, a former stockholder nevertheless learned of the planned equity raise and leveraged that information to increase the settlement amount with the stockholder representative by another $1 million.
The Company’s board concluded that Hoffman, the Plaintiff, leaked the information. Though the board “had no concrete evidence,” the board drew this conclusion because (i) the planned equity raise remained non-public information and (ii) only Hoffman “had a positive relationship” with the former stockholder. In turn, and out of fear of further leaks, the board established a committee comprising all the directors except Hoffman.
Disagreeing with his exclusion, Hoffman retained counsel and exchanged a series of correspondence with the Company, including a Section 220 demand, ultimately resulting in an indemnification and advancement request. Though it produced responsive book and records, the Company claimed the Plaintiff breached his fiduciary duties and denied any indemnification or advancement. The captioned litigation ensued.
Arguments
Neither party disputed that the Plaintiff’s director status afforded him certain mandatory advancement rights under a separate indemnification agreement with the Company. But only defined “covered proceedings” triggered that right. The issue was whether an “investigation” and an “inquiry” was conducted in order to trigger a covered proceeding.
The Plaintiff contended that because the Company concluded he leaked the non-public information and therefore breached his fiduciary duty, “the [Company] necessarily must have conducted an ‘investigation’ and/or ‘inquiry’ into [the Plaintiff’s] actions.” Thus, the Plaintiff contended, because the Company conducted either an investigation and/or inquiry, the Company triggered the Plaintiff’s mandatory advancement right. The Company contended “it never undertook an investigation or inquiry into [the Plaintiff’s] conduct.”
Court’s Analysis and Findings
The Court determined that the board took no steps to confirm the belief that the Plaintiff leaked the information and found that “the Company did not investigate or otherwise conduct an inquiry into [the Plaintiff].” The Court ultimately held that because “the Company directors started from the conclusion that [the Plaintiff] leaked” the non-public information, the Company’s actions were “corrective actions from that conclusion, not investigative actions undertaken in reaching that conclusion.” Thus, because the Company only took “remedial, not investigatory” actions to assuage their fear of further leaks, the board’s response fell “short of an ‘investigation’ or ‘inquiry’ sufficient to trigger [the Plaintiff’s] advancement rights.”
The Court, as it often does, turned to dictionary definitions in order to ascertain the plain meaning of the words “investigation” and “inquiry.” Relying on these definitions, the Court denied the Plaintiff mandatory advancement, holding: these definitions require “more positive action, pomp, and procedure than one individual’s immediate deductive conclusion based on known facts.”
Takeaway
The Plaintiff might have succeeded in procuring advancement from the Company if the language setting forth the events triggering his advancement right included broader categories. For instance, if the clause included “conclusion, accusation, or contention of the Company,” then the board’s actions, though falling short of “investigation” or “inquiry,” would nevertheless still likely rise to the level of a “conclusion, accusation, or inquiry” sufficient to trigger the mandatory advancement right.