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A recent Court of Chancery decision rejected an attempt to recoup advancement based on the terms of an indemnification clause. See Computer Sciences Corporation v. Pulier, C.A. No. 11011-CB (Del. Ch. May 21, 2019), for this recurring issue in Delaware corporate and commercial litigation.

Issue Addressed:  May a company recoup, via an indemnification claim, the amounts it previously was required to pay via an advancement ruling, based on the applicable contractual indemnification provisions.

Prior Procedural History:

·     Prior rulings in this matter were highlighted in prior blog posts on these pages–including rulings granting advancement.  See also transcript ruling in this matter cited at footnotes 12 and 13, that granted advancement based on the prior holding that: “conduct as an officer . . . was squarely at issue.”  Slip op. at 4 (citing footnotes 12 and 13).

Court’s Holding:

·     Based on the applicable terms of the indemnification provision in the agreement of sale, the court determined that the indemnification provisions only covered post-closing losses for “board-approved” liabilities related to the sale, which was not the basis for the prior advancement granted in this case.

This post was prepared by an Eckert Seamans attorney.

The Court of Chancery recently awarded an applicant, Eric Pulier, all of his requested fees and expenses for advancement even though some of the expenses incurred related to the defense of claims asserted against SRS, a defendant not seeking advancement. In Pulier v. Computer Sciences Corp., No. 12005-CB (Transcript)(Del. Ch. Aug. 7, 2017), a former officer and director of ServiceMesh before its merger with CSC, Pulier, faced a civil suit alleging that he engaged in misconduct prior to the merger.  The background facts of this action were discussed more fully in a prior summary on these pages.

CSC defended against the advancement application on two grounds. First, CSC contended that the allegations against Pulier related to his individual conduct independent and separate from his status as an officer and director of ServiceMesh.  The Court quickly dispensed with this argument.

CSC next argued that two of Pulier’s four claims for advancement related to expenses incurred in defense of claims pending against SRS, and not against Pulier. CSC contended that these legal fees should not be advanced because they were not incurred for Pulier’s benefit.

Chancellor Bouchard granted all of Pulier’s requests for advancement, finding that the expenses incurred by Pulier against the CSC-versus-SRS claims “contain virtually identical allegations” to those claims raised against Pulier. Relying upon Fitracks, the Court found that CSC must indemnify Pulier for all of his legal expenses, which benefitted multiple defendants including Pulier and would have been necessarily incurred even if Pulier were the sole defendant.

Takeaway: The Court of Chancery continues to grant advancement claims to applicants even when only one of many parties is entitled to advancement when the legal bills incurred were necessary in the event the applicant were the sole defendant.  The Court of Chancery also continues to demonstrate reluctance to parse through the piecemeal minutiae of law firm bills for advancement defenses for allocation purposes.

A recent Chancery decision is notable partly because it falls within the minority of advancement cases that deny advancement of fees to a former employee who was given the title of vice president. Its application may be limited due to procedural quirks and its reliance on New Jersey law. In Aleynikov v. The Goldman Sachs Group, Inc., C.A. No. 10636-VCL, Order and Final Judgment (Del. Ch., July 13, 2016), the Court of Chancery’s post-trial decision features an unusual result in that a vice president was denied advancement, but the 17-page Order of the court was based primarily on the doctrine of “issue preclusion”, and in particular how that concept was construed under New Jersey case law. Thus, it may not be of widespread usefulness in other Delaware corporate litigation regarding advancement.

The Court of Chancery also explained why it disagreed with an analysis of the doctrine of contra proferentem as applied by the U.S. Court of Appeals for the Third Circuit, but nonetheless felt constrained by its decision based on the doctrine of issue preclusion. Notwithstanding its obligation to follow that prior ruling, for much of the 17-pages of the Order, the Court of Chancery explained why it disagreed with the Third Circuit and why it would have reached a different conclusion. This case is now on appeal before the Delaware Supreme Court.

This case should be compared to another recent decision which also shares the uncommon result of denying advancement to someone with the title of an officer. See Pulier v. Computer Sciences Corp., highlighted on these pages. That separate case was also impacted by the application of another state’s law.

Procedural History

The procedural history of this case is somewhat tortuous. Initially, the United States District Court for the District of New Jersey granted summary judgment in favor of Aleynikov on the advancement issue, but on appeal, the United States Court of Appeals for the Third Circuit reversed and vacated the trial court’s ruling. Aleynikov then filed the instant action in Delaware seeking an interpretation of his rights under Delaware law. On April 28, 2016, the Court of Chancery held a one-day trial.

Useful Aspects of Decision

Based on the finding that the court was bound by a prior ruling of another court, which in turn was based on New Jersey law, this Order has limited application, and that is one reason the court likely explained its 17-page decision in the form of an Order, as opposed to a formal opinion. Nonetheless, the Court’s discussion of the doctrine of contra proferentem, as well as the concept of in pari materia when interpreting the bylaws of a parent company and the different bylaws of its subsidiaries, could have useful application. Also useful is the truism observed by the court that corporations have the authority to extend the benefits of advancement not only to officers but also to all employees and agents of a company. See DGCL Section 145(e).

Compare Recent Similar Holding

This case should be compared to another recent Chancery decision in a separate matter that also reached the unusual conclusion of not awarding advancement; and that case was also based on non-Delaware law and the constrained interpretation of the word “officer” under Nevada law and Nevada bylaws. See Pulier v. Computer Sciences Corp., et al., C.A. No. 12005-CV (transcript) (Del. Ch. May 12, 2016), as highlighted on these pages here.

 

For those of us who follow the latest developments in the law of advancement claims for directors and officers, a recent transcript ruling should be of interest, due to circumstances not often addressed in advancement decisions that we have highlighted on these pages for the last decade. Courtesy of Kyle Wagner Compton of The Chancery Daily fame, we bring you highlights of a recent decision in the pending case of Eric Pulier v. Computer Sciences Corp., et al., C.A. No. 12005-CB, hearing (Del. Ch. May 12, 2016), heavily borrowing from the unparalleled reporting of TCD‘s indispensable coverage of all things Chancery. Based on what I have seen so far, this may warrant inclusion in my annual ABA book chapter in which I update each year with key decisions on advancement and indemnification. (The 2016 edition is available from the ABA.) A key issue addressed in this case was whether the claimant was an officer as that term is defined in the applicable bylaws.

TCD alerted us to the following highlights, which are in large part from Kyle Wagner Compton of TCD (though any errors are my own).

The issue was not the usual argument about whether the former officer was acting in a corporate capacity, but instead: whether plaintiff is in fact a “covered” or “indemnified” person subject to advancement and indemnification under defendant’s bylaws. The analysis depended in part on Nevada law, because defendant is a Nevada corporation, and in part on the wording of defendant’s bylaws regarding who qualified as a “vice president” or other officer.

The claimant was the founder and CEO of the acquired company, called ServiceMesh, which defendant — Computer Sciences — acquired for a few hundred million. Plaintiff was kept on to manage his former company as a division of the acquiring company, essentially continuing his pre-existing CEO role, and given the title of Vice President.  The plaintiff was not elected by the board of directors, and thus not entitled to advancement and indemnification under Computer Sciences’ bylaws. The acquiring company sued plaintiff for taking actions as a D&O of the acquired company before closing that weren’t discovered until after closing.  There are two potential bases for advancement: the acquired company’s bylaws for acts taken in the capacity of D&O of the acquired company before closing, and defendant’s bylaws for acts taken in the capacity of Vice President after closing.

Given the nature of his role, one might easily assume that one holding the title of Vice President would be considered an officer of the company.  There is other evidence, such as his being identified as a member of Computer Sciences’ “executive team.”  But Nevada law, which governed the application of the acquiring company’s bylaws, specifies that you can only be a corporate officer in a manner specified in the company’s bylaws, and Computer Sciences’ bylaws specify that officers must be elected by the board of directors.

Other claims, however, were governed by the former company’s bylaws which did not have that prerequisite of election by the board to qualify as an officer for purposes of advancement claims. The Chancellor concluded that five out of seven claims asserted against plaintiff related to acts taken as D&O of ServiceMesh, his prior company, and the court held that he was entitled to advancement for 80% of his expenses based on ServiceMesh’s bylaws.  Based on the prerequisites of the bylaws of the acquiring company controlled by Nevada law, however, the court held that the plaintiff was not entitled to advancement for post-closing acts where his only basis for advancement was under the Computer Sciences’ bylaws.

Takeaway:  This case exemplifies the risk of not being aware that notwithstanding: (a) one’s hiring as a consequence of an acquisition of a company that one founded; (b) assuming responsibility for the management of that business as a division of the acquirer; (c) performing the same types of duties performed as CEO before the acquisition; and (d) with a title like Vice President that is at least nominally an officer-like title, it is still possible based on the terms of a bylaw or other controlling document, to not qualify as an “officer” for purposes of advancement. Thus, those officers and directors who remain in the service of an acquiring company, and the lawyers who advise them, need to be aware of this issue.

Also courtesy of The Chancery Daily are links to the bylaws involved in this case. Amended and Restated Bylaws of Computer Sciences Corp., Feb. 7, 2012 and Amended and Restated Bylaws of ServiceMesh, Inc., Nov. 14, 2011.

Supplement: Keith Paul Bishop published an article about this case in The National Law Review, kindly linking to this post, and providing insights into the Latin roots of the word “vice” as a helpful supplement to the issue in this case about who qualified as a “vice president”.

POSTSCRIPT: Coincidentally, a somewhat similar issue was addressed at a hearing recently in a separate case before another member of the Court of Chancery. In Aleynikov v. The Goldman Sachs Group, Inc., C.A. No 10636-VCL (Del. Ch. April 28, 2016), after a hearing, the court took under advisement an advancement issue certified to it by the U.S. District Court for the District of New Jersey. The issue turned on whether the person seeking advancement, who was given the title of  Vice President by Goldman Sachs, was an “officer” as that term was defined for purposes of being entitled to advancement pursuant to the applicable governing documents. The recent Chancery hearing was the latest iteration of long-running litigation involving several courts in several states, as reported in Law360 in an article on April 28, 2016. We will be watching closely for the court to render its published opinion in this case, and we will be certain to provide highlights.