Search results for: advancement

Frank Reynolds, who has been covering Delaware corporate decisions for various national publications for over 40 years, wrote this article.

The full Delaware Supreme Court recently ruled that the federal Employee Retirement Income Act of 1974 does not automatically bar the managers of an investment fund from accessing ERISA assets to defend themselves from state law breach of duty claims in Invictus Global Management, LLC, et al. v. Invictus Special Situations Master I, L.P., Del. Supr., No. 283, 2025 (April 13, 2026).

Justice Karen Valihura’s April 13 opinion on behalf of the en banc Delaware high court agreed with the appellant fiduciaries that (1)  the requested advancement for state-law claims, which is subject to recoupment, would not necessarily relieve ERISA fiduciary duty or responsibility and (2) that advancement is not contingent on a showing of ability to repay under either the fund’s governing documents or ERISA.   Therefore, advancement would not always impermissibly relieve the fund fiduciaries’ duty under ERISA, the high court ruled.

Importantly for D&O insurance and indemnification specialists, the justices pointed to a U.S. Ninth Circuit Court of Appeals opinion in  Johnson v. Couturier 572 F.3d 1067, 1080 (9th Cir. 2009), as to when “advancement may be enjoined under section 410 if (i) there is a likelihood that a fiduciary duty was breached or (ii) the ERISA fiduciary is unable to demonstrate an ability to repay.”  

Any deliberate wrongful acts or gross negligence?   

The justices noted that the Ninth Circuit’s decision in Johnson relied on a determination that the indemnification provisions were likely void under section 1110 if they “clearly ‘purport to relieve’ Defendants from their fiduciary responsibilities under ERISA.”  In that ruling, the Ninth Circuit noted that the indemnification provisions “provide[d] complete indemnity so long as the challenged acts or omissions d[id] not involve deliberate wrongful acts or gross negligence. 

The prudent man standard

The Ninth Circuit determined that the indemnification agreements effectively limit Defendants’ liability under ERISA, “ so long as they do not engage in deliberate violations of the ERISA ‘prudent man’ standard of care.”

Background

Plaintiff Invictus Special Situations Master I, L.P.  was a privately held fund formed to make and hold investments from ERISA. Defendants-appellants are Invictus Global   Management, LLC and Invictus Special Situations I GP, LLC and various individuals associated with them collectively accused of misusing their positions.

In October 2023, the Fund’s controlling limited partners removed Invictus GP and IGM as the Fund’s general partner and management company, respectively, and filed this action for wrongful acts or gross negligence. The Fund sought injunctive and declaratory relief, claiming defendants breached the Partnership Agreement and Management Agreement by withholding information — and approximately $10 million in Fund assets after the Fund removed Invictus GP and IGM as its general partner and management company.

The Chancery decision

The Court of Chancery determined that, based on federal case law and United States Department of Labor guidance, section 1110 renders void any contractual provision that purports to allow an ERISA-regulated plan to indemnify and advance funds to an ERISA fiduciary using plan assets.  The fiduciaries argued that canceled out the right to advancement that Delaware law provided them.

Reversed on appeal

On appeal, the Fund argued that both indemnification and advancement have the exculpatory effect of “abrogating the plan’s right to recovery from the fiduciary for breaches of fiduciary obligations.”

The fiduciaries contended that, “While the rights to indemnification and advancement are correlative, they are still discrete and independent rights, with the latter having a much narrower scope,” but “the ultimate right to keep payments characterized as an ‘advancement’ depends upon whether the former corporate official is entitled to indemnification.”

The high court ruled that, “Any breach of fiduciary duties under ERISA, including breaches of the prudent person standard and per se violations, would constitute non-indemnifiable Disabling Conduct. Thus, the Fund retains the right to recover from Defendants for any ERISA fiduciary duty breaches.”

“The parties have not cited any decision of any court that has applied the relevant provisions of ERISA to bar advancement for expenses incurred in defending claims arising under state law,” the Supreme Court noted.

Frank Reynolds, who has been covering Delaware corporate decisions for various national publications for over 40 years, prepared this article.

The Court of Chancery recently ruled that Genesis CMG Holdings LLC cannot cosmetically re-word its non-compete violation charges against an ex-director/officer of the direct advertiser to avoid its obligation to advance funds for his defense in the underlying action in, Theodore Barr v. Genesis CMG Holdings, LLC, C.A. No. 2025-0981-SEM (Del. Ch. Dec. 23, 2025).

 Vice Chancellor Paul Fioravanti Jr.–who had been overseeing the advancement suit and the company’s initial claim that after resigning, ex-officer Theodore Barr tried to pirate key information and personnel from Genisis–gave a Magistrate the authority to decide dueling motions in the advancement action.  She granted Barr’s summary judgment motion on grounds that despite the re-wording, the nature of the non-compete action’s claims remained essentially the same. 

The ruling is important for corporate law as well as director and officer insurance specialists because it was decided largely based on which guidepost Chancery opinion it most resembled regarding the ability of a defendant company to reword a complaint in a way that renders it no longer eligible for advancement of defense funds: 

Carr v. Global Payments Inc.,

The Magistrate found that  Genisis’ motion to dismiss the advancement suit after the company re-worded its underlying non-compete complaint should be denied because it was akin to Carr v. Global Payments where the Court of Chancery ruled,  because “[t]he gravamen of the underlying complaint [was] that [the individual] had access to proprietary information by reason of the fact that he was a director and officer  and that he wrongly used that information for his personal benefit,” this Court denied the corporation’s motion to dismiss the individual’s advancement claim.”  Carr v. Global Payments Inc., 2019 WL 6726214, (Del. Ch. Dec. 11, 2019)

 Brown v. LiveOps, Inc.,

“Far from the concessions made in Carr, the amendments in the Underlying Action are largely cosmetic,” the Senior Magistrate noted in distinguishing the Genisis amended complaint and granting plaintiff Barr’s motion for summary judgment on the advancement issue.  In Brown v. LiveOps, the corporation had sued a former officer and director for violating “its contractual and intellectual property rights by operating a competing business” formed after the individual left the corporation, the Senior Magistrate said, noting that, in doing so, it pled that many of the competitive acts occurred before the individual left the corporation. 

“Unlike the defendant in Carr, the Defendant has not removed any cause of action, abandoned any theory of liability, or added new facts inconsistent with advancement.”  Brown v. LiveOps, Inc., 903 A.2d 324, 325 (Del. Ch. 2006).

Background

Plaintiff Theodore Barr co-founded Converze Media Group, LLC a California-based media agency that developed and executed direct response advertising strategies for its clients but sold his 45% equity interest in Converze to the Defendant and entered into an Amended and Restated Limited Liability Company Agreement with the defendant in 2023.  Under the LLC Agreement, Barr was named as an initial director of the Defendant, and entered into an employment agreement to serve as the Chief Client Officer .

It was that role and Barr’s acknowledged intimate knowledge of Converze’s business that sparked the company’s underlying suit alleging that he later misused his ability to adversely affect Converze after he sold his stock and began an allegedly competing business.  Genesis CMG Holdings, LLC v. Simplicity Media, LLC, C.A. No. 2025-0676-SEM.

But when Barr sought advancement of defense costs in that action, Converze amended and re-worded its complaint regarding his alleged violations of the non-compete pact, claiming that as amended the charges were no longer based on actions that arose from his director/officer role, so Barr is no longer entitled to advancement.

Mooted?

In her December 23 ruling on the dueling advancement motions, the senior magistrate  said at oral argument, the Defendant’s attorney conceded that, to some extent, the Initial Complaint in the Underlying Action was drafted in such a way that it could be interpreted as related to or arising out of the Plaintiff’s performance of his duties, but  contended that that the Amended Complaint “fixed the issue and cut off any post-amendment advancement.”   

The Court disagreed. “Delaware law recognizes the ability of a defendant corporation to moot an advancement dispute by removing any [claims] that would trigger an advancement right ,” the Senior Magistrate said, noting the Chancery Court’s decision in Mooney v. Echo Therapeutics, Inc., 2015 WL 3413272, (Del. Ch. May 28, 2015);

However, that ability is limited by the Carr ruling that looks to substance over form. “The mere relabeling of claims will not support [denying advancement] when the underlying litigation remains substantially the same,” she added.  Besides that, the parties agreed that   8 Del. C. § 145 is comparable and under that standard, “if there is a nexus or causal connection between any of the underlying proceedings . . . and one’s official corporate capacity, those proceedings are by reason of the fact . . .without regard to one’s motivation for engaging in that conduct,” the court said, referring to In re Genelux Corp., 2015 WL 6390232, (Del. Ch. Oct. 22, 2015).

Fees on fees?

Granting Barr’s fees petition, the Senior Magistrate held, “This Court awards fees on fees when a plaintiff successfully shows an entitlement to advancement that wrongfully was withheld by the defendant corporation.”

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).

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.

A recent gem of a short letter ruling from the Delaware Court of Chancery in Goldman v. LBG Real Estate Company LLC, C.A. No. 2023-0426-KSJM (Del. Ch., Feb. 26, 2024), provides important insights, with citations to authority, on three noteworthy topics of widespread relevance to corporate litigators:

  • California courts find “Delaware law on advancement particularly persuasive because of the depth of its experience with corporate governance issues.”  Slip op. at 2 and footnote 6 which cites to several cases (other citations omitted).
  • Like Delaware, California allows fees on fees proportionate to the degree of success of a claimant.  See Slip op. at 2 and footnote 7 (citing cases).
  • This letter ruling was in the context of a motion for reargument under Rule 59(f), and the fact that the court made quick work of the motion in a 3-page decision is an indication of how much of an uphill battle such motions usually are.

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. 

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 Tilton v. Stila Styles, LLC, 2023 Del. Super. LEXIS 772 (Del. Super. Ct. Sep. 19, 2023), the Delaware Superior Court found an advancement claim unripe.

Tilton served as the sole manager of Stila Styles, LLC, a single-member Delaware LLC (the “Company”).  When the Company’s sole member removed her as manager, the Plaintiff challenged her removal in the Court of Chancery, lost, appealed, and lost again.

Tilton, the Plaintiff, sent the Company completely redacted legal fee invoices.  The Company in turn requested unredacted copies. The Plaintiff sent back partially redacted copies but on the same day filed a complaint against the Company seeking in the Superior Court, inter alia, her outstanding fees and expenses the Company did not advance pending the appeal of the Court of Chancery suit.

The Court determined that the Plaintiff “prematurely” sought a judgment on the pleadings and brought an “unripe” advancement claim.  In doing so, the Court admonished: “Rather than provide [the Company’s] counsel with an opportunity to determine the reasonableness of [the Plaintiff’s] advancement requests, [the Plaintiff] precipitously sought court intervention.”  The Court further advised: “[t]hese are the exact sort of litigation tactics that unnecessarily burden the Court and vitiate what would otherwise be a good faith petition for judicial relief.”

 Finding the advancement claim “unripe,” the Court instructed that “[the Plaintiff’s] counsel frustrated any viable process to resolve the advancement requests in good faith by providing partially redacted invoices the same day that they filed the instant action, seeking payment of those entries.”  The Court ordered the parties to meet and confer on the advancement claim because “[w]hether the entries themselves are reasonable or not is a factual dispute, and until the parties meet and confer on a good faith basis to resolve the advancement demands, moving for judgment on the pleadings is not ripe, and hence, improper.”

Takeaways: First, before filing a complaint, the party seeking advancement should provide the board with invoices redacted only as necessary to preserve any privilege.  Second, the party seeking advancement should wait until the board responds, or, if the board returns no timely response, the party seeking advancement should wait a reasonable amount of time in which a board could otherwise respond. 

This article was prepared by Frank Reynolds, who has been following Delaware corporate law and writing about it in various publications for more than 35 years

The Delaware Court of Chancery has ruled that the contempt sanction of a $1,000-a-day fine is an appropriate means of forcing Hone Capital LLC to comply with the Court’s previous order to advance funds for an ex-officer’s defense of Hone’s charges that she fraudulently managed an investment  fund in Gandhi-Kapoor v. Hone Capital LLC  and CSC Upshot Ventures I LLP, No. 2022-0881-JTL Opinion issued  (Del. Ch., July 19, 2023).

Among the many cases on advancement highlighted on these pages over nearly two decades, this decision is especially noteworthy for, among other things, emphasizing the public policy reasons behind advancement and the serious consequences that might follow for not fulfilling advancement obligations–as determined by the Court to be owed.

Vice Chancellor Travis Laster’s July 19 opinion granted former Hone CFO Purvi Gandhi-Kapoor’s motion to hold Hone and its CSC Upshot Ventures I LLP fund in contempt for flouting his earlier summary judgment decision that they had no excuse for their seven month-long failure to honor an advancement agreement   He decided that the circumstances justified a fine, not as a punishment, but as just enough coercion to obtain compliance with the court order when irreparable harm was on the horizon.  And the ruling warned that a receiver could be used to force compliance.

In a decision affecting corporate and insurance law specialists, the court found that although “contempt is not generally available to enforce a money judgment,” the holder of this advancement judgment need not resort to slower collection mechanisms because, “The right to advancement is a time-sensitive remedy…A lack of timely advancements prejudices the covered person’s ability to defend the underlying litigation, potentially resulting in irremediable consequences, such as an adverse judgment or a conviction.”

Background

Gandhi-Kapoor was a member of limited liability company Hone, served as its Chief Financial Officer, and had the title of Partner. At Hone, she reported to Bixuan Wu and together with Wu, managed the Upshot Fund.

For disputed reasons, the CSC Group, the parent of Hone, terminated Wu. Gandhi-Kapoor resigned, and in 2020, caused Hone to file a lawsuit against Gandhi-Kapoor in California Superior Court accusing her of breach of fiduciary duty and fraud. That action was consolidated with Gandhi-Kapoor’s California declaratory judgment suit seeking a ruling that she was entitled to a percentage of the Upshot fund’s profits as promised compensation.

The Court awarded summary judgment in April in Gandhi-Kapoor’s advancement suit against both Hone and Upshot, at which time they owed nearly $1 million in submitted fees but neither has contested any of the billed amounts nor paid anything, the vice chancellor ruled.  He said seven months had passed since Gandhi-Kapoor had made what has been found to be a valid demand for advancement.  The companies unsuccessfully argued that there was no proof of irreparable harm.

Contempt petition ruling

In response to Gandhi-Kapoor’s petition for a contempt ruling, the Vice Chancellor decided that, “Advancement provides corporate officials with immediate interim relief from the personal out-of-pocket financial burden of paying the significant on-going expenses inevitably involved with investigations and legal proceedings,” citing Homestore, Inc. v. Tafeen (Tafeen III), 888 A.2d 204, 211 (Del. 2005). The proceeding is summary, he said, because “immediate interim relief” must be provided in timely fashion to be effective since the advancement award “is also an interim monetary award, akin to an interim award of alimony or an interim fee award,” and “the covered person faces a threat of irreparable harm.”

The Vice Chancellor said Delaware entities are not required to provide advancement, but if they chose to, they may be compelled through contempt rather than collection procedings to make paymemts if:

*The companies are actually found to be in contempt, and “To establish civil contempt, [the movant] must demonstrate that the [opponent] violated an order of the court of which they had notice and by which they were bound.” Handels AG v. Johnston, 1997 WL 589030, at *3 (Del. Ch. Sept. 17, 1997). The standard of proof required in a civil contempt proceeding is a preponderance of the evidence, and there is no longer any doubt that the companies are in contempt, he ruled.

*The remedy is appropriate. “If the primary purpose of the remedy is to coerce compliance with the court’s order, then the remedy is civil in character.” But he noted, “a court is obligated to use the least possible power adequate to the end proposed.” TR Invs., LLC v. Genger, 2009 WL 4696062, at *18 n.74 (Del. Ch. Dec. 9, 2009).

The appropriate remedy

The Vice Chancellor said he could have chosen to use the court’s “broad power” to force advancement order compliance by employing a receiver to utilize the respondent companies’ assets to provide Gandhi-Kapoor the awarded funds—especially where there was a history of refusal without valid reason.  Delaware laws that govern corporations and limited liability companies alike urge the courts to endow the receiver with just enough power to effect compliance.

Vice Chancellor Laster took that limited power principle a step further.  He noted that Gandhi-Kapoor had submitted a new brief in support of immediate relief in the form of a daily fine, but he decided that at least initially, he could impose the fine without employing a receiver to do it.  He calculated that Hone gained $658 per day by retaining the money it owed to Gandhi-Kapoor for her defense so the $1K per-day fine would be an incentive to pay up.

However, considering new information from Gandhi-Kapoor indicating that Hone might be selling or restructuring to put assets out of the Court’s reach, he held the door open for the future appointment of a receiver with appropriate power to cope with that situation.

The recent Delaware Court of Chancery decision in Krauss v. 180 Life Sciences Corp., C.A. No. 2021-0714-LWW (Del. Ch. Mar. 7, 2022), addressed nuances of advancement law that will be useful to those who labor in the field of corporate litigation dealing with these issues that are crucial to officers and directors.

The key points of law that makes this decision blogworthy are twofold: (i) it serves as a reminder that some compulsory counterclaims may be eligible for advancement; and (ii) it reinforces the longstanding interpretation in Delaware of the phrase that serves as a prerequisite to providing advancement, with an origin in § 145 of the Delaware General Corporation Law, and which was used in the provision of the Bylaws at issue in this case–namely, whether the person seeking advancement was sued “by reason of the fact” that she was an officer.

Advancement has been a frequent topic of commentary on these pages over the last 17 years, and has been the subject of many articles and book chapters published by this writer.

Background:

Unlike the corporate charter involved in this case, the advancement provision in the Bylaws of the company involved did not require board approval for advancement to be given for certain types of proceedings.

Highlights:

Perennially, one of the more common defenses to a claim for advancement, and often the least successful argument–as in this case–is whether the prerequisite to the provision for advancement in the Bylaws was triggered to the extent that the litigation for which advancement was sought was prosecuted: “by reason of the fact that . . . [the plaintiff] is or was a director or officer of the company.”  See Slip op at 8-9 and n.32.

As the Court explained, the foregoing phrase is broadly interpreted by Delaware courts, and many published decisions have explained in many different ways why it is very easy to satisfy that condition of advancement, despite may failed attempts by companies to use it as a defense.  See Id. at 9-10.  See also footnotes 32-37.

Also noteworthy in this case is the reminder that the court will not typically make a determination at the advancement stage about an allocation between legal fees that must be advanced–and intertwined claims in the same case that are not subject to advancement.  But rather, the parties should follow the procedure in the Danenberg v. Fitracks  decision to make advancement payments based on the good faith allocation of the parties, and a final allocation will be made at the end of the case.  See Slip op. at 12 and footnotes 44-45.

Another noteworthy aspect of this case is the reminder that compulsory counterclaims are covered by the right to advancement when asserted to defeat or offset an underlying claim that is subject to advancement.  See Slip op. at 20 and footnote 74-81.

 

—

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.