Search results for: "section 145"

During the 17 years or so of this blog’s existence, we have featured many Delaware decisions on the topic of indemnification and advancement for directors and officers, interpreting a company’s obligations to make those payments pursuant to Delaware General Corporation Law (DGCL) Section 145, in addition to contract-based claims for advancement and indemnification. See also several book chapters I have published on advancement and indemnification as the Chair of the Indemnification and Advancement Subcommittee of the ABA Business Law Section’s Corporate Litigation Committee.  Enough background, and now for the main event:

The purpose of this short post is to make note of a consequential amendment, recently passed by the Delaware Legislature and signed by Gov. Carney, to DGCL Section 145, which as amended allows Delaware companies to use a captive insurance company to provide coverage for directors and officers–such as for purposes contemplated by Section 145–but with a few key exceptions. Relevant to this statutory amendment is a recent Delaware Supreme Court decision that concluded: Delaware’s statutory indemnification provisions allow corporations to purchase D&O insurance “against any liability,” whether or not the corporation has the power to indemnify against such liability.  

One of Delaware’s favorite nationally recognized corporate law scholars and one of the leading indigenous Delaware firms have provided exemplary commentary on this new development in corporate law. Those interested in this development should also read the reliably thoughtful insights by D&O insurance expert Kevin LaCroix on his widely-read blog, The D&O Diary.

 

A recent Delaware Court of Chancery decision ordered mandatory indemnification based on success in underlying litigation pursuant to DGCL § 145(c), in the matter styled:  Brown v. Rite Aid Corporation, C.A. No. 2017-0480-MTZ (Del. Ch. May 24, 2019).

Issue Addressed:  Whether dismissal of the underlying litigation based on a technical argument was “success” for purposes of mandatory indemnification under DGCL Section 145(c)–even if all of the arguments in the underlying litigation were not successful?

Answer:  Yes.

Procedural Background:

The procedural history of this litigation involves multiple court decisions in several jurisdictions over the span of a decade.  See, e.g., cases cited at footnotes 4, and 13 through 17.

Even though Brown was convicted and sentenced for certain financial crimes in connection with his role as an officer and a director of Rite Aid, in separate civil litigation pursued against him by Rite Aid, Brown was successful in having that litigation dismissed based on technical procedural arguments.  See footnotes 18 through 20 and accompanying text.

Key Aspects of Court’s Legal Analysis:

The court began its analysis by explaining that indemnification sought in this matter was based on three separate sources.

First, Brown relied on DGCL Section 145(c) which requires indemnification when a present or former director or officer has been “successful on the merits or otherwise” . . ..  The court noted that Section 145(c) is independent and non-exclusive of any right based in the charter, which in turn is independent and non-exclusive of any bylaw right, which in turn is independent and non-exclusive of any contract right, absent specific agreement to the contrary.  See Section 145(f), which makes this clear in both the indemnification and the advancement context.

The second basis for indemnification in this case was a provision in the corporate bylaws.

The third basis for indemnification sought in this matter was a provision in the corporate charter.

Notably, the court observed that even though Section 145(c), in the current version of the statute, covers officers and directors, the court added : 

“But when a corporation has provided other authorized individuals with mandatory indemnification to the fullest extent of the law, then that right extends the mandatory indemnification contemplated by Section 145(c) to those individuals”  (citing Dore v. Sweports, Ltd., 2017 WL 415469, at * 18 (Del. Ch. Jan. 31, 2017)).

The foregoing extension of the mandatory indemnification of Section 145(c), which in its current form only benefits directors and officers–to employees, agents and others that are expressly granted indemnification in the bylaws “to the fullest extent allowed by law”–is not well-known even by those familiar generally with the nuances of advancement law in Delaware.

The court explained that Section 145(c) provides for mandatory indemnification for an officer and a director who meets the requirements of the statutory provision, which is when: “a covered person defending himself in a covered proceeding . . . succeeds on the merits or otherwise . . ..”  See Slip op. at 10.  See also footnotes 39-41.

Other Notable Bullet Points:

·     The court recited the public policy rationale behind mandatory indemnification as including the need to encourage capable individuals to serve as corporate directors, which is viewed less as an individual benefit and more as a desirable mechanism in return for greater corporate benefits.

·     A key point and an essential aspect of the court’s reasoning is its reliance on an abundance of case law that interprets the “success” requirement in Section 145(c) very broadly.  That is, in order to satisfy the requirement of success “on the merits or otherwise” under Section 145(c), one must merely obtain any result in a lawsuit “other than conviction,” which does not equate with moral exoneration, but rather can be satisfied merely from:  “escape from an adverse judgment or other detriment, for whatever reason . . ..”  See footnotes 54 to 55 and accompanying text.

·     Moreover, if such a broad definition of success is achieved, it is not relevant, and the court will not inquire into, whether all arguments were won, or if preliminary motions or other efforts in the underlying litigation failed before the final successful result was reached.  See footnote 56 and accompanying text.  See also footnotes 72 to 80 and accompanying text.

·     The court also granted fees on fees and required Brown to file an affidavit under Rule 88, itemizing the fees for which he seeks indemnification, along with a motion seeking an entry of an order requiring the corporation to indemnify him in the amount specified in the damages motion.

In Jackson Walker L.L.P. v. Spira Footwear Inc.,  2008 WL 2487256 (Del. Ch., June 23, 2008), read opinion here, the Delaware Chancery Court ruled on the following issue of first impression in connection with interpreting advancement rights under DGCL Section  145:

The crux of this case is whether Jackson Walker’s actions as Spira’s outside litigation counsel constitute actions of an agent of the corporation under the Bylaws and DGCL § 145. This appears to be an issue of first impression under Delaware law.

The court reasoned that the Jackson firm was entitled to advancement as an agent under Section 145 based on the claims against it relating to the role in which it was sued by the company.

There have been quite a number of Chancery decisions about advancement over the last week or so, and this is the third Chancery Court opinion in as many days on the issue of advancement–and two of the decisions on the same day were by the same vice chancellor.

The factual background in this matter relates to litigation in Texas in which the Jackson firm was representing Spira during a control contest. After a new majority took over Spira, they fired the Jackson firm and then sued the Jackson firm claiming that despite following the instructions of the management in control of Spira at the time, those actions were not in the best interests of Spira. In effect, the argument was that the Jackson firm should have second-guessed management about what was in the company’s best interest. As the court described the claims, which did NOT involve malpractice, for purposes of deciding the issue of agency:

The alleged wrongs for which Spira has sued Jackson Walker all represent instances where Jackson Walker acted on behalf of Spira in relations with third parties. As outside litigation counsel, Jackson Walker was Spira’s agent because it had the “power to act on behalf of the principal with third persons.” Trial lawyers have the ability to bind their client in dealings with the court and other parties to the litigation

Central to the court’s analysis was a prior Chancery decision involving an attorney who sought advancement, but unlike the Jackson firm in this case, that attorney was not acting as outside litigation counsel:

Both parties rely on this court’s decision in Fasciana v. Electronic Data Systems Corp.,50   for their positions as to why Jackson Walker does, or does not, qualify as Spira’s agent. In that case, the plaintiff Fasciana was an attorney who represented a target company and its shareholders in connection with its sale to the defendant corporation.
By and large, Fasciana performed corporate transactional work. After the acquisition, Fasciana continued to provide legal advice and services as an attorney for the defendant corporation. Later, based on certain actions he took in connection with the sale of the target company, he was indicted on criminal charges and named as a defendant by the acquiring corporation in a civil suit, alleging malpractice and fraud on his part, together with other misdeeds. In seeking advancement of his litigation expenses, Fasciana contended that, based on his actions as an attorney for the acquiring corporation, he satisfied the statutory term, “agent,” and thus had a right to advancement.

The court in Fasciana noted that the “term agent is thrown around in many legal contexts and often without great precision,” but held that the Delaware General Assembly intended “§ 145 as embracing the more restrictive common law definition of agent, which generally applies only when a person (the agent) acts on behalf of another (the principal) in relations with third parties.” The court further noted that Section 145’s grant of indemnification tracks the concept of agent indemnification found in agency law. Thus, a person may be an “agent” for purposes of Section 145 when she may otherwise look to her principal for indemnity for those acts within the scope of the agency that are fairly said to be the actions of the principal. Conversely, the court held the concept of an “agent” under § 145 does not include a lawyer who acts as a legal advisor to a corporate client, but does not act on the client’s behalf in relations with third parties. (most footnotes omitted from quote).
 50.    829 A.2d 160 (Del. Ch. 2003).

In Happ v. Corning, Inc., the U.S. Court of the Appeals for the First Circuit, read opinion here, recently applied Delaware law and interpreted DGCL Section 145, (Section 145 of the Delaware General Corporation Law found in Title 8 of the Delaware Code), to support the summary judgment finding that a director of a company was required to pay back the almost $1 million in legal fees that his company advanced in connection with a civil suit by the SEC. That suit resulted in a verdict that he engaged in insider trading (in the amount of about $40,000.) The director argued that the "undertaking" to pay back the advanced fees demanded by the company as a condition of advancement was signed "under duress" and that it went beyond the undertaking requirement of Section 145. The  U.S. Court of Appeals for the First Circuit, applying Delaware law, disagreed with the argument.  The court reasoned that even if the exact language of 145 was used, it is doubtful that the judgment of insider trading could be consistent with either the "good faith" and/or the "best interests of the company" provisions of 145. Compare generally, DGCL Section 102(b)(7) which allows a provision in a certificate of incorporation that prohibits recovery of monetary damages from directors for a shareholder claim that is exclusively based on a violation of the duty of care. It is in the nature of an affirmative defense and it is the burden of the directors to demonstrate that they are entitled to such a charter provision. It does not, however, prevent injunctive relief from being awarded. See, Malpiede, 780 A.2d at 1095; see generally, In re Walt Disney Company Derivative Litigation, 907 A.2d. 693 (Del. Ch. 2005).

This Happ case involves the less than common situation where there is a  court opinion finding that a company’s advancement must be paid back. Most of the case law in Delaware recently on this topic is a clarification of the company’s obligation to make the advancement, where applicable. This is a good example of why a party needs advancement, as most people cannot wait until the case is over to finance almost $1 million in legal fees, and then wait for post-trial indemnification (if warranted). It is not clear whether the officer in this case has the wherewithal to make the repayment, however, which highlights the company’s conundrum. The Court of Appeals reasoned that the director should have filed a declaratory judgment action if he thought the undertaking was made under duress and/or was beyond that required by Section 145.  ( I will not give in to the temptation to describe the unsuccessful plaintiff in this case as hapless.)

Brown v. LiveOps, Inc., download file . This Chancery Court case addressed the issue of whether a former officer was entitled to advancement under Section 145(k) of the DGCL. The specific issue was whether an underlying California action against a former officer asserted claims that were against the former officer “by reason of the fact” that he was an officer, director or employee of the Delaware corporation. The court concluded that the claims arose out of his former position and that mere “relabeling of those claims did not change the substantive, operative reality of those claims." Thus, the Motion to Dismiss the advancement claim was denied.

Andrew A. Ralli, an associate in the Wilmington office of Lewis Brisbois, prepared this blog post.

A recent Delaware Court of Chancery decision determined whether persons seeking advancement satisfied the undefined term “officer” under the Bylaws and the Delaware General Corporation Law (the “DGCL”).  In Gilbert v. Unisys Corp., No. 2023-0513-PAF (Del. Ch. Aug. 13, 2024), the Court was tasked with determining whether Plaintiffs, a former Senior Vice President and Vice President of a Delaware corporation, were “officers” entitled to advancement for fees incurred to defend themselves in a Pennsylvania action.

The Plaintiffs proffered three theories under which they believed they are entitled to advancement under the Bylaws: (i) they were officers of the corporation; (ii) the “Presidents” were officers, and became Presidents, after an acquisition; and (iii) Plaintiffs served an enterprise at the request of the Corporation. The court addresses each theory in turn and found that Plaintiffs were entitled to advancement under each theory.

Highlights:

The Court recognized that advancement is “purely permissive” and, under Section 145(f) of the DGCL, permits a corporation to grant advancement rights in its corporate documents or by separate contract.  As Vice Chancellor Fioravanti explained, Section 145 serves the dual policies of: “(a) allowing corporate officials to resist unjustified lawsuits, secure in the knowledge that, if vindicated, the corporation will bear the expense of litigation; and (b) encouraging capable women and men to serve as corporate directors and officers, secure in the knowledge that the corporation will absorb the costs of defending their honesty and integrity.” 

Many Delaware corporations “provide for mandatory advancement as an enticement to attract qualified individuals to serve as directors and officers.” This is because the corporation maintains the right to be repaid all sums advanced, if the individual is ultimately shown not to be entitled to indemnification. Thus, the advancement decision is, effectively, a contingent loan. 

In this case, neither the Certificate nor the Bylaws explicitly define “officer.” However, the Bylaws do identify two categories of officers, which were “at a minimum”  ambiguous.  First, there are officers who are expressly identified by title. These are “a Chief Executive Officer, a President, one or more Vice Presidents, a Secretary, a Treasurer, [and] a Controller.” Section 1 states that these “shall” be officers. The court labeled these as “mandatory officers.” The second category comprises of “other officers as may be elected … at the Board’s discretion.” The Court labeled these as “discretionary officers.” 

Due to the Bylaws’ ambiguity in “mandatory” and “discretionary” officers, Plaintiffs, unsurprisingly, contend that the ambiguity must be construed in their favor under the doctrine of contra proferentem.  Seeking guidance from Delaware precedent, the Court found that “[t]here is a tension between the transcript rulings in Pulier[1] and Centrella I,[2] which held that an election was a pre-requisite for officer status, and Aleynikov[3] and Kale,[4] which took a broader view and relied on contra proferentem.”  In resolving this tension, the Court stated:

Admittedly, some of the discussion in Aleynikov, despite its careful and detailed analysis, is dicta. But so are Pulier and Centrella I on the issue of whether a bylaw that denominates Vice Presidents as mandatory officers precludes persons with that title from receiving mandatory advancement unless the board of directors formally chooses them as officers or expressly designates another officer to do so, as both resolved whether discretionary officers were entitled to advancement.

…

One can easily imagine a prospective officer reading the Bylaws, seeing that vice presidents “shall” be officers, and concluding that they would be an officer entitled to advancement. . . . [C]onsistent with the persuasive reasoning in Aleynikov, the court finds that reasonable individuals who are hired as [] Vice Presidents by persons with authority to bestow the title can reasonably conclude under the Bylaws that they are officers of the Company.

In other words, the Court agreed with Plaintiffs that the president Plaintiffs are officers under the Bylaws’ advancement provision and, thereby, entitled to advancement of fees and expenses for the Pennsylvania action, further explaining that: “Delaware policy ‘supports the approach of resolving ambiguity in favor of indemnification and advancement.’”

Notable Takeaway:

When a corporation decides to utilize Section 145(f) of the DGCL, it should do so with specificity. In failing to do so, corporations, being the “drafters” or otherwise, potentially face the unwanted consequence of advancing fees and expenses to more persons than intended. The Court’s decision in Gilbert serves as a “caution” for others:

A reasonable person standing in the shoes of a prospective indemnitee … ought to be able to look at the advancement provisions in the … [corporate documents] and clearly determine whether they are entitled to advancement … rely[ing] on a reasonable interpretation thereof. … Plaintiffs are correct. That [the Corporation] doled out Vice President titles to dozens of employees is of its own doing. [The Corporation] “easily could have clarified whether or not the title of ‘Vice President’ was an officer title for purposes of advancement and indemnification.” [They] did not. Therefore, the ambiguity must be resolved in Plaintiffs’ favor.

With Delaware’s bedrock freedom of contract principle, parties have a right to enter into good and bad contracts. The law enforces both.

Footnotes

[1] Pulier v. Computer Scis. Corp., C.A. No. 12005-CB (Del. Ch. May 12, 2016) (TRANSCRIPT).

[2] Centrella v. Avantor, Inc. (Centrella I), C.A. No. 2022-0876-NAC (Del. Ch. Dec. 14, 2022) (TRANSCRIPT).

[3] Aleynikov v. Goldman Sachs Gp., Inc., C.A. No. 10636-VCL (Del. Ch. July 13, 2016) (ORDER).

[4] Kale v. Wellcare Health Plans, Inc., C.A. No. 6393-VCS (Del. Ch. June 13, 2011) (TRANSCRIPT).

Frank Reynolds, who has been covering Delaware corporate decisions for various national publications for over 35 years, prepared this article     

The Delaware Court of Chancery recently ordered biotech firm InterMune Inc.’s former CEO to repay nearly $6 million in director and officer insurance funds he spent trying to overturn his felony wire fraud conviction for misleading investors about the effectiveness of a lung disease treatment in InterMune Inc. et al. v. Harkonen, No. 2021-0694-NAC (Del.Ch. Aug. 1, 2024)

Vice Chancellor Nathan Cook found that in nearly two decades of investigation, negotiation and litigation stemming from a false 2002 press release about the commercial prospects for his interferon gamma-1b treatment Harkonen never successfully appealed his convictions or proved that he should not be liable for all the defense funds advanced to him from various D&O insurers and InterMune’s coffers. 

He ruled that two D&O insurers that had advanced funds had been paid by InterMune in a settlement after Harkonen was convicted and that under Section 145 of the Delaware General Corporation Law the company had a right to sue its ex-officer to repayment since the litigation was found to be non-indemnifiable.  

In addition, the vice chancellor rejected Harkonen’s counterclaims seeking a declaration that the Company must reimburse him for various legal expenses he accrued in a related California Medical Board disciplinary proceeding, two insurance arbitrations, advancement negotiations with InterMune, and a presidential pardon. 

He found that then-President Donald Trump’s pardon of the wire fraud conviction came long after a final adjudication of the case and could not qualify as a “successful defense of the charges.”  And “In addition to being procedurally improper, each of Dr. Harkonnen’s claims is either untimely or fails to satisfy the requirements for indemnification under Section 145.” 

Background

Harkonen founded InterMune in 2000 and issued a press release two years later extolling his new product, Actimmune which he claimed was “a major breakthrough” with “results [that] will support the use of Actimmune and lead to peak sales in the range of $400–$500 million per year[.]” – even though the study’s results indicated a failure.  One year later, Harkonen and InterMune negotiated a mutual release of claims against each other, and he resigned, only to face a 2004 justice department investigation that led to a 2008 indictment and a 2009 conviction.

That conviction carried an up to 20-year prison sentence; meanwhile InterMune’s D&O insurers began to seek repayment after learning that the charges and advancement would not qualify for indemnification and Harkonen began a decade of appeals.

At the same time, InterMune and its insurers pressed objections to what they insisted was Harkonen’s continuing “profligate” spending on attorney fees in many appeals and other legal proceedings.

The indemnification ruling

The vice chancellor laid out the ground rules for this type of indemnification case, noting that:

*”The corporation, rather than the employee, bears the burden of proof in an advancement claw-back action.”

*“In the case of a mandatory indemnification provision, the burden rests on the party from whom indemnification is sought to prove that indemnification is not required.”

*The applicable evidentiary burden in this post-trial context is proof by a preponderance of the evidence. [P]roof by a preponderance of the evidence means proof that something is more likely than not.”

*”Bylaw[s] not only mandate indemnification; [they] also effectively place the burden on [the Company] to demonstrate that the indemnification mandated is not required.”

Fraud = bad faith conviction

“Dr. “Harkonen is precluded from establishing good faith under Section 145(a) because his [wire fraud] conviction is conclusive evidence that he acted in bad faith,” Vice   Chancellor Cook wrote. “Dr. Harkonen is therefore ineligible to be indemnified for the advanced amounts he spent defending his wire fraud charge and appealing his conviction.”

Therefore Dr. Harkonen must repay the Company for the $5,906,927.02 it paid to settle the insurance disputes and six defenses Harkonen presented fail to prevent that, the court ruled, noting why each argument fails:     .

  • The Company waived and released all claims under the Mutual Release. The Court said: “Nowhere in Dr. Harkonen’s affirmative defenses did he assert the Mutual Release as a defense to InterMune’s claims. “
  •  The Company is barred by hold harmless provisions in the Indemnity Agreement and the Mutual Release. The Court said, “This defense, like the Mutual Release defense, was raised for the first time in the pre-trial briefings, which was too late for InterMune to focus its discovery on the hold harmless provisions of the two agreements.”
  •  The settlement payment was voluntary. The Court said: “InterMune devoted not insignificant portions of its briefing to rebutting this defense. And Dr. Harkonen ultimately withdrew the defense of voluntary payment at trial. “
  •  The Company’s claims are time-barred, The Court said: “InterMune filed its Complaint on August 11, 2021, well within the 3-year window under either alternative.  Harkonen’s time-bar defense therefore fails.” 
  •  The Company is barred by the unclean hands doctrine. The Court said: “The Company’s efforts to win the insurance arbitrations, or at least minimize any award, are not unclean hands. If they were, companies would be confronted with conflicting and strange incentives.” 
  •  The settlements themselves are not advancement fees. The Court said, “By mentioning the defense for the first time in passing at the trial on a paper record, the defense is waived. The analysis ends there.” 

Additional indemnification requests

The vice chancellor said Dr. Harkonen now requests indemnification “under 8 Del. C. § 145(c) for expenses incurred in (1) litigating the MBC action, (2) seeking advancements from the Company, (3) litigating the D&O insurance arbitrations, and (4) seeking the Pardon.” 

No fees or fees-on-fees

The Court held that Dr. Harkonen is not entitled to indemnification for the costs incurred in the medical board proceeding either, because the claim is both untimely and he was unsuccessful in the respective proceeding. This advancement claim regarding any of the legal actions is brought too late for the three-year time limit, the court said.  Finally, Dr. Harkonen also requests an award of fees on fees for this action, but given that he did not prevail on any claim, Dr. Harkonen is not entitled to fees on fees, Vice Chancellor Cook concluded

Key Delaware decisions on advancement under DGCL Section 145 for directors and officers were highlighted in a just-published book chapter in an ABA publication that I co-authored with 5 of my colleagues in the Delaware office of Lewis Brisbois. This is the 8th year that I have highlighted key advancement cases for a book chapter for the ABA.

Links to other advancement decisions highlighted over the last 19 years on this blog, as well as prior ABA book chapters on this topic are available on these pages.

The Delaware Business Court Insider again published this year’s Annual Review, reprinted below with the courtesy of The Delaware Business Court Insider. (c) 2020 ALM Media Properties, LLC. All rights reserved.

This is the 17th year that Francis Pileggi has published an annual list of key corporate and commercial decisions of the Delaware Supreme Court and the Delaware Court of Chancery, often with co-authors. This list does not attempt to include all important decisions of those two courts that were rendered in 2021. Instead, this list highlights notable decisions that should be of widespread interest to those who work in the corporate and commercial litigation field or who follow the latest developments in this area of Delaware law. Prior annual reviews are available here.

This year’s list focuses, with some exceptions, on the unsung heroes among the many decisions that have not already been widely discussed by the mainstream press or legal trade publications. Links are also provided below to the actual court decisions and longer summaries.

DELAWARE SUPREME COURT DECISIONS

Supreme Court Confirms Impact of Bankruptcy on LLC Membership

A recent Delaware Supreme Court ruling endorsed the reasoning of a Delaware Court of Chancery decision holding that federal bankruptcy law does not entirely preempt the Delaware LLC Act to the extent that the LLC Act provides for a member of an LLC to become an assignee only, with economic rights, upon the filing of bankruptcy by that member, in Zachman v. Realtime Cloud Services LLC, 228 A.3d 1065 (Del. April 20, 2021).

Delaware High Court Finds First State Charter Outweighs Other Factors in Dole Foods Choice-of-Law Ruling

The Delaware Supreme Court decided a consequential case in 2021 addressing choice-of-law and fraud-exclusion issues in connection with requiring D&O insurers to pay settlements with investors who claimed that the CEO of Dole Foods Company Inc. cheated them in a going-private buyout.  RUSI Indemnity Co. Inc. v. Murdock, et al., No. 154, 2020 (Del. March 3, 2021).  Among the reasons that this decision is noteworthy is because it established the applicability of Delaware law to the insurance policy of a company incorporated in Delaware, but which had many contacts elsewhere.  Also, importantly, the court determined that insurance coverage would not be defeated simply because it covered payment for the settlement of fraud allegations.  The high court added that Delaware does not have a public policy against the insurability of losses occasioned by fraud, reasoning that Delaware’s statutory indemnification provisions allow corporations to purchase D&O insurance against any liability whether or not the corporation has the power to indemnify against such liability.

Delaware Rules Shareholder Franchise Right Question Tops Entire Fairness Test

In Coster v. UIP Companies, Inc., et al., No. 29, 2020 (Del. June 28, 2021), the unanimous opinion of Delaware’s high court en banc required that on remand the Court of Chancery determine if a board acted for inequitable purposes or in good faith, but for the primary purpose of disenfranchisement without a “compelling justification,” in connection with a stock sale intended to shift the power balance between rival deadlocked stockholder fashions, even if the sale were fairly negotiated.  If the trial court found after remand that the transaction was intended for inequitable purposes without a compelling justification, the trial court could consider available remedies including cancelling the stock sale and considering the appointment of a custodian.  Chief Justice Seitz wrote for the Supreme Court that the sanctity of the shareholder franchise superseded entire fairness review based on the circumstances of this case.

Supreme Court Clarifies Test for Direct v. Derivative Stockholder Claims

Although this is a decision that has already received widespread commentary, the Supreme Court decision in Brookfield Asset Management, Inc. v. Rosson [TerraForm], No. 406, 2020 (Del. Sept. 20, 2021), is a seminal decision that every corporate litigator must be aware of because it redefines and clarifies the test in Delaware to distinguish between a direct stockholder claim and a derivative stockholder claim.

Supreme Court Clarifies Pre-Suit Demand Analysis

Another Supreme Court decision that has already been the subject of extensive analysis but is still required reading for all corporate litigators is United Food and Commercial Workers’ Union and Participating Food Industry Employers Tri-State Pension Fund v. Zuckerberg, No. 404, 2020 (Del. Sept. 23, 2021), because it clarifies and restates the law in Delaware for the analysis of pre-suit demand futility for purposes of pursuing a derivative stockholder claim.

Supreme Court Decides Important Contract Dispute in Sale of Business

The Supreme Court of Delaware affirmed an epic Delaware Court of Chancery decision that found a breach of an agreement of sale that permitted the buyer to avoid consummation of the purchase for failure to comply with the “ordinary course covenant” in connection with how the business was managed between the date the agreement of sale was signed and the date of closing.  See AB Stable VIII LLC v. MAPS Hotels and Resorts One LLC, Del. Supr., No. 71, 2021 (Dec. 8, 2021).  The Supreme Court explained that the seller was required to obtain the prior written consent of the buyer before making the changes that it made, and distinguished the separate reasoning that applied to the material adverse change clause.

DELAWARE COURT OF CHANCERY DECISIONS

Company’s Privileged Communications Must Be Provided to Board Members

The Court of Chancery decided an issue of first impression in Delaware by rejecting the argument that the management of a Delaware corporation has the authority to unilaterally preclude a director of the corporation from obtaining privileged information of the corporation.  See In re WeWork Litigation, No. 2020-0258-AGB (Del. Ch. Aug. 21, 2021).

Recent Chancery Decision Addresses Dissolution Based on LLC Deadlock

The Delaware Court of Chancery penned a seminal decision that explains the analysis necessary to determine when a deadlock in an LLC might be the basis for a dissolution.  In Mehra v. Teller, C.A. No. 2019-0812-KSJM (Del. Ch. Jan. 29, 2021), the court addressed whether there was a failure to achieve the votes necessary for board action and whether the board deadlock was genuine or merely manufactured to force the appearance of a deadlock.

Chancery Keeps Dissolution Case Despite Mandatory NY Forum Clause

Although the general rule in Delaware is that forum selection clauses will be upheld, even if they require litigation to be conducted in states outside of Delaware, an exception to the rule was applied to keep a dissolution case in Delaware notwithstanding a contrary mandatory forum selection clause, in Seokoh, Inc. v. Lard-PT, LLC, C.A. No. 2020-0613-JRS (Del. Ch. March 30, 2021).

Self-Sacrifice Not Required of Controlling Stockholder

A useful Chancery decision that is bound to be of widespread applicability is the ruling in RCS Creditor Trust v. Schorsch, C.A. No. 2017-0178-SG (Del. Ch. March 18, 2021), in which the court explained that the fiduciary duties of a majority or a controlling stockholder do not require self-sacrifice, nor do they mean that such a fiduciary forfeits her contractual rights.

Chancery Addresses Forum Non Conveniens

Delaware law has evolved regarding the nuances of forum non conveniens, and those most recent iterations are explained in the Chancery decision styled Sweeny v. RPD Holdings Group, LLC, C.A. No. 2020-0813-SG (Del. Ch. May 27, 2021).

Chancery Recognizes Reverse Veil-Piercing

The Delaware Court of Chancery recently recognized “outside reverse veil-piercing,” as compared to “insider reverse veil-piercing.”  The former iteration was explained based on the unusual circumstances present in Manichaean Capital, LLC v. Exela Technologies, Inc., C.A. No. 2020-0601-JRS (Del. Ch. May 25, 2021).

Chancery Clarifies Standard to Shift Fees for Improper Litigation Conduct

The Court of Chancery’s pithy ruling in Pettry v. Gilead Sciences, Inc., C.A. No. 2020-0132-KSJM (Del. Ch. July 22, 2021), remains noteworthy for its guidance that provides litigators in general, and corporate litigators in particular, with a definition of “glaringly egregious,” and helps to clarify where the line is drawn for determining when fees will be shifted for inappropriate litigation conduct.  This decision gives greater instruction for what behavior will be sufficient to trigger the exception to the general American Rule that each party pays its own legal fees.

Can Fiduciary of a Debtor Assist a Creditor-Entity that Fiduciary Has Interest In?

The Court of Chancery addressed the titular topic in Skye Mineral Investors, LLC v. DXS Capital (U.S.) Limited, C.A. No. 2018-0059-JRS (Del. Ch. July 28, 2021).

Chancery: LLC Managers Breached Fiduciary Duties

The Chancery decision in Stone & Paper Investors, LLC v. Blanch, C.A. No. 2018-0394-PAF (Del. Ch. July 30, 2021), deserves attention for its treatment of well-established principles of fiduciary duty with widespread applicability in the LLC context, absent unambiguous waiver.  Also noteworthy, is the explanation about why the circumstances of this case allowed breach of contract claims to proceed to the extent that they did not overlap the fiduciary claims–and why both were permitted to be pursued through trial.

Chancery Explains Policy Limits to Contractual Restrictions on Fraud Claims

In connection with perennial post-closing claims related to the sale of a business, the Chancery decision in Online Healthnow, Inc. v. CIP OCL Investments, LLC, C.A. No. 2020-0654-JRS (Del. Ch. Aug. 12, 2021), explains the consequential nuances about what specific language in an agreement of sale will allow, or will bar, certain types of fraud claims.  The money quote from the decision provides the best insight into its holding: “Under Delaware law, a party cannot invoke provisions of a contract it knew to be an instrument of fraud as a means to avoid a claim grounded in that very same contractual fraud.”

Chancery Clarifies When Forum Selection Clause Binds Non-Signatory

While it may be surprising to some, quite a few Delaware decisions have bound non-signatories to forum selection clauses.  The Chancery decision in Florida Chemical Company, LLC v. Flotek Industries, Inc., C.A. No. 2021-0288-JTL (Del. Ch. Aug. 17, 2021), provides the most thorough analysis of the titular topic, with scholarly insights and copious citations that explain the theoretical and public policy underpinnings that support the decision to bind a non-signatory to a forum selection clause, and the prerequisites for doing so.

Chancery Does Deep Dive into Corporate Dissolution Details and Winding-up Process

Those interested in the not self-evident winding-up process in connection with the dissolution of a corporation under Delaware law need to read the Court of Chancery decision styled:  In re Altaba, Inc., C.A. No. 2020-0413-JTL (Del. Ch. Oct. 8, 2021), which provides an extensive analysis of the statutory provisions for the dissolution of corporations and a description of the corresponding winding-up process.

Chancery Declines to Follow First-Filed Rule in Advancement Case

A recent Chancery decision explained why the first-filed rule was not applied in an advancement case under Section 145 of the Delaware General Corporation Law.  See Lay v. Ram Telecom International, Inc., C.A. No. 2021-0631-SG (Del. Ch. Oct. 4, 2021).

Chancery Provides Guidelines for Non-Delaware Lawyers Issuing Formal Delaware Legal Opinion Letters

The Court of Chancery in Bandera Master Fund LP v. Boardwalk Pipeline Partners, LP, C.A. No. 2018-0372-JTL (Del. Ch. Nov. 12, 2021), provides comprehensive detail of the factual background of the issuance of a formal legal opinion letter in connection with a transaction, and provides a thorough analysis of problems with that letter in a 194-page decision which also offers guidance to lawyers around the country who are involved in issuing a formal opinion letter based on Delaware law.  The court found that the formal opinion letter given in the transaction at issue was not rendered in good faith, and explained what lawyers need to do in order to make sure the formal opinion letters that they grant do not suffer the same fate.

Chancery Clarifies Officer Consent Statute

Several years ago the Delaware Supreme Court expanded the prior interpretation of Delaware’s consent statute that imposes personal jurisdiction on directors and officers who agree to service in that capacity for Delaware corporations.  The contours of that expansion continue to be clarified and defined for those situations where there has been no breach of fiduciary duty.  See BAM International, LLC v. MSBA Group, Inc., C.A. No. 2021-0181-SG (Del. Ch. Dec. 14, 2021).

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SUPPLEMENT: Professor Stephen Bainbridge, one of Delaware’s favorite corporate law scholars, and one of the most prominent corporate law expert’s in the country, was kind enough to link to this article and described it as “essential reading”.

*Francis G.X. Pileggi is the managing partner of the Delaware office of Lewis Brisbois Bisgaard & Smith LLP, and the primary author of the Delaware Corporate and Commercial Litigation Blog at www.delawarelitigation.com.

**Ciro C. Poppiti, III practices in the Delaware office of Lewis Brisbois Bisgaard & Smith LLP.

***Cheneise V. Wright is a corporate and commercial litigation associate in the Delaware office of Lewis Brisbois Bisgaard & Smith LLP.

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 decided Zhongpin Inc. shareholders’ battle to force the food processor’s director and officer insurer to pay the $41.3 million Chancery Court judgment they won by challenging an unfairly-priced buyout must be fought in the Delaware Superior Court. Rodriguez et al. v. Great American Insurance Co., No. 2020-0387-JRS letter opinion issued (Del. Ch. Oct. 20, 2021).

Vice Chancellor Joseph Slights’ Oct. 20 decision dismissed the plaintiff shareholders’ insurance action from the Chancery Court, but not because they lacked standing or that there was no coverage for the default judgment he had awarded them in an underlying breach-of-duty action, as defendant Great American Insurance Company contended. He said he never reached those issues because Delaware law required him to first make a sua sponte ruling as to whether the insurance action was essentially a damages recovery suit that did not belong in a court of equity such as Chancery–but rather belonged in Delaware’s trial court of general jurisdiction: the Superior Court. Notably, Vice Chancellor Slights previously served as a judge on the Superior Court in its Complex Commercial Litigation Division.

Corporate and insurance law specialists will find the letter opinion of interest since it appears to shut the Chancery Court door on additional exceptions to the long-standing rule that has kept D&O disputes in the state’s Superior Court.

Rejected Arguments

After supplementary briefing, Vice Chancellor Slights rejected arguments from both parties that he could retain subject matter jurisdiction based on:

(a) Statutory authority and 8 Del. C. § 145(g) empowering corporations to procure insurance and Section 145(k)’s grant of plenary authority with respect to indemnification. The vice chancellor said a similar statutory argument was squarely addressed and rejected in Massachusetts Mutual Life Insurance Co. v. Certain Underwriters at Lloyd’s of London, 2010 WL 2929552, at (Del. Ch. July 23, 2010), where the plaintiffs sought to compel coverage and the payment of a claim under a D&O policy directly against the insurer. That court found “This is precisely the type of dispute that fits squarely within the jurisdiction of our Superior Court.”

(b) The clean-up doctrine — invoked where the court that exercised jurisdiction over an underlying action is empowered to adjudicate a dispute arising from the plaintiff shareholders attempt to enforce their underlying judgment. The vice chancellor said in order to exercise that power, he would have to be able to answer “yes” to questions as to whether jurisdiction over the claims would:

1) resolve a factual issue which must be determined in the proceedings;
2) avoid a multiplicity of suits;
3) promote judicial efficiency;
4) do full justice;
5) avoid great expense;
6) afford complete relief in one action; or
7) overcome insufficient modes of procedure at law.

Background
The litigation sprang from a 2012 squeeze-out of Zhongpin investors by Xianfu Zhu, the company’s de facto controlling stockholder. Zhu caused Zhongpin to enter a transaction with two of his wholly owned entities whereby the minority stockholders of Zhongpin were cashed out for inadequate consideration. That transaction prompted breach-of-duty claims against the Class Action Defendants that resulted in Slight’s default judgment after Zhu and his directors and offices stopped paying their defense firm, failed to hire a replacement and stopped defending the action, the court said.

The insurance action
Following the default judgment, the plaintiff shareholders tried to collect from the D&O insurer on behalf of the company because it came in a derivative action and because Zhu, the directors and officers and company and its assets were in China and allegedly could not be located, let alone reached.

Plaintiffs argued that the GAIC policy covered losses incurred during the time frame of the wrongdoing alleged in the underlying action and that the losses are not excluded, but the insurer countered that the plaintiffs had no standing to seek coverage under the D&O Policy, the claims arose outside the coverage period, and the claims are governed by several exceptions or failures of conditions in the policy. GAIC refers to the D&O Policy’s No Action Clause, which says:

“No action shall be taken against the Insurer unless, as a condition precedent thereto, there shall have been full compliance with all the terms of this Policy” and
“The Insureds shall not incur Costs of Defense, or admit liability, offer to settle, or agree to any settlement in connection with any Claim without the express prior written consent of the Insurer”.

A court of limited jurisdiction
The vice chancellor noted that the Court of Chancery is a court of “limited jurisdiction;” and maintains subject matter jurisdiction only when:
(1) the complaint states a claim for relief that is equitable in character,
(2) the complaint requests an equitable remedy when there is no adequate remedy at law or
(3) Chancery is vested with jurisdiction by statute.

He concluded that none of those conditions are present here because, “At heart, the [Plaintiffs] assert that [GAIC] . . . [has] not fulfilled [its] obligations under [its] [] policies. This is fundamentally a breach of contract action for money damages, which is the traditional province of the Superior Court.” Transfer to Superior Court will not involve delay while another judge is forced to become familiar with a complex case, he said, because the insurance action is separate and new and plays to the experience and strength of the Superior Court.
Finally, the vice chancellor volunteered to finish the case if needed as a temporary Superior Court judge—using his pre-Chancery experience in that court.

Takeaways
The Oct. 20 opinion only decided what court would try to resolve a number of novel and interesting issues in a unique insurance case – complicated by the fact that Zhongpin had merged into a Delaware shell corporation but had few corporate ties to the U.S. In addition to the standing, coverage and other questions to be answered:

Even if the plaintiffs could access the insurance proceeds, how would the court resolve the GAIC policy requirements that Zhongpin defend the underlying shareholder suit and get permission to settle it — considering that the company’s owners, officers and directors had apparently abandoned the litigation?

If the plaintiffs won a coverage decision for the underlying derivative suit, would they contest a decision to send the funds to Zhongpin management somewhere in China on behalf of the shareholders?