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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 Court of Chancery recently found Delaware’s Limited Liability Company Act requires American Rail Partners LLC to reimburse the legal bills a managing member and its directors and CEO incur in defense of ARP’s unjust enrichment and mismanagement charges — even if such “first party claims” are not specifically covered, in International Rail Partners LLC et al. v. American Rail Partners LLC, No. 2020-0177-PAF, memorandum opinion issued, (Del. Ch. Nov. 24, 2020).

Vice Chancellor Paul Fioravanti, Jr.’s Nov. 24, 2020 memorandum opinion on a novel advancement issue rejected ARP’s contention that two-member limited liability company agreements, like two-party commercial contracts, provide fee-shifting in some situations but not advancement and indemnification for the company’s suit against a member.

Ruling on dueling summary judgment motions, he sided with the plaintiffs seeking advancement, finding that unlike commercial contracts, the Delaware Limited Liability Company Act Section 18-108 was designed to encourage LLC officers, directors and members to serve without worry about suits over their actions on behalf of the company.

The underlying action

ARP filed an underlying action in February in the Delaware Superior Court, spurred by non-party member Newco SBS Holdings, LLC’s complaint that the management of the other member, International Rail Partners LLC, and ARP CEO and Chairman-of-the-Board Gary Marino unjustly profited at ARP’s expense. American Rail Partners, LLC et al. v. International Rail Partners LLC et al., C.A. No. N20C-02-283 EMD complaint filed (Del. Super. Feb. 28, 2020).

When IRP, Marino and their corporate allies sought advancement, ARP claimed the type of claims in the Superior Court suit could never be indemnified despite the broad scope of Section 10.02(c)(i) of the LLC Agreement, contending that an indemnification or advancement provision may only cover first-party claims if it expressly says so.

The court said that argument is grounded in a line of decisions which established a presumption that a standard indemnification provision in a bilateral commercial contract would not automatically be presumed to provide for fee-shifting in the indemnity section of a contract. TranSched Sys. Ltd. v. Versyss Transit Solutions, LLC, 2012 WL 1415466 (Del. Super. Mar. 29, 2012).

Not like a commercial contract

That decision spawned others that barred fee shifting in a commercial contract unless specifically spelled out, and the only Chancery Court ruling on the issue, Senior Housing Capital, LLC v. SHP Senior Housing Fund, LLC, 2013 WL 1955012 (Del. Ch. May 13, 2013), followed TranSched in holding that the indemnity provision in a management agreement was not a valid fee-shifting provision between the parties because it did not contain language indicating an intent to cover first-party claims.

But Vice Chancellor Fioravanti said the parties here were unable to locate any case applying the first-party/third party distinction to an indemnification or advancement provision in a certificate of incorporation, corporate bylaws, limited partnership agreement, or limited liability company agreement.

Defendant ARP argued that there was no significant difference between those agreements and a commercial contract, but the court said, “Unlike typical commercial contracts, indemnification and advancement provisions in LLC agreements are derived from clear statutory authority and apply much more broadly.”

The LLC Act statute, 6 Del. C. § 18-108, prescribes that an LLC contract “may indemnify any person to the fullest extent possible by contract. The only restrictions are those expressly set forth in the contract,” the opinion says. Therefore, “the clarity of the provision regarding power to indemnify, located in Section 18-108, underscores an effort to avoid any uncertainty or negative implication that might exist if the statute were silent on this important point.”

Not like TranSched

Even though “alternative entity agreements are a type of contract” the broad language of the LLC Agreement’s indemnification provision, and the strong public policy in favor of indemnification and advancement,” caused the vice chancellor to conclude that the first-party/third-party claim distinction applied in the TranSched line of cases is inapplicable here.

Even if there is a fee-shifting provision in the parties’ LLC agreement, it expressly applies only to members so it does not eviscerate the indemnification and advancement rights found elsewhere in the pact, the court ruled.

Defendant argued that ARP’s management agreement is the only possible source of indemnification because the claims in the Superior Court Action arise from IRP providing services to the company, but the vice chancellor held that, “because the company has asserted non-contract claims in the Superior Court Action, the court cannot determine at this stage whether the company’s claims asserted against the defendants in that action (i.e., Plaintiffs here) are exclusively governed by the management agreement.”

In granting summary judgment for plaintiffs and denying judgment to defendants, the court ruled that because the plaintiffs are entitled to advancement, they are also entitled to reasonable attorney fees and expenses to pursue advancement, commonly referred to as “fees-on-fees.”

This is the twelfth year that I am providing an annual list of key Delaware corporate and commercial decisions. In one of my past annual reviews, I listed only three key cases, and in other years I listed a few dozen. This year I am taking the middle ground and selecting eleven cases that should be of widespread interest to those who engage in corporate and commercial litigation in Delaware, or to those who follow the latest developments in this area of law. In preparing this list, I eschewed some widely-reported 2016 cases that have already been the subject of extensive commentary in other legal publications. Thus, the list this year may omit one or more blockbuster cases that readers likely have already read about elsewhere. This list is an admittedly subjective exercise, and I invite readers to contact me with suggestions for cases that they believe should be added to–or deleted from–this list. (Unlike last year, this year I don’t have the benefit of adopting the list of cases that a member of the Delaware Court of Chancery publicly described as the 2015 opinions that he thought were especially noteworthy.)

Delaware Supreme Court Decisions

Hazout v. Tsang. This opinion changed the law that prevailed for the last 30 years regarding the basis for imposing personal jurisdiction in Delaware over corporate directors and officers. The accepted case law for the last three decades limited jurisdiction over directors and officers of Delaware corporations, if that position was the only basis for imposing jurisdiction, to claims such as breaches of their fiduciary duties. Now, however, Delaware courts can impose personal jurisdiction over directors and officers if they are “necessary or proper parties” to a lawsuit even if there are no fiduciary duty claims or violations of the DGCL. This opinion from Delaware’s high court features a new interpretation of Section 3114 of Title 10 of the Delaware Code, which provides that when a party agrees to serve as a director or officer of a Delaware entity, she thereby consents to personal jurisdiction in Delaware. This opinion also provided a new application of the registration statutes found at Section 371 and 376 of Title 8. A more detailed discussion of the case appeared previously on these pages.

Genuine Parts Co. v. Cepec. In contrast to the foregoing Hazout case, which made it easier to impose personal jurisdiction in Delaware over certain parties to a lawsuit, this opinion did the opposite. Again departing from thirty years of prior Delaware case law, in connection with Delaware’s long-arm statute found at Section 3104 of Title 10 of the Delaware Code, this ruling reasoned that: “In most situations where the foreign corporation does not have its principal place of business in Delaware, that will mean that Delaware cannot exercise general jurisdiction over the foreign corporation.” A prior overview of this case appeared on these pages.

OptimisCorp v. Waite. This ruling provides indispensable insights from Delaware’s high court on the duties and limitations imposed on directors who are appointed by particular stockholders. These board members, sometimes referred to as “blockholder directors,” are often torn between their allegiance to the corporation and their ties to the stockholder that appointed them–often by written agreement as a condition to an investment in the company. Although it reads like an opinion, the format of this ruling is an Order of the court. (The name of the plaintiff is not a typo; it’s a conjoined name with no space, but with a capital in the middle.) Most readers know that transcript rulings and Orders can be cited in briefs as authority in Delaware, and this Order contains many eminently quotable gems. The decision affirmed a 213-page opinion by the Court of Chancery, but provided slightly different reasoning and more authoritative insights. Specifically, the Court expressed displeasure with a “Pearl Harbor-like . . . ambush” of a stockholder board member when that stockholder had the ability to remove the directors that ambushed him if he had known of their insurgent intentions prior to the meeting. Highlights of this ruling previously appeared on these pages.

El Paso Pipeline GP Co., LLC v. Brinckerhoff. This decision features a relatively rare reversal of a Court of Chancery decision on the perplexing issue of whether a stockholder claim is derivative or direct–or both. It should be encouraging, even for those who follow this area of the law, that this issue can be so nuanced and difficult to understand that even the Chancellor could be mistaken, though his friends on the Supreme Court called his reversed decision “thoughtful.” In sum, this ruling rejected the Chancery Court’s conclusion that a merger occurring after trial but before the decision of the court had been issued, did not extinguish the plaintiff’s derivative claims. Because the claims were only derivative, the claims were extinguished.

In a concurrence, the Chief Justice argued that the Delaware Supreme Court’s 2006 decision in Gentile v. Rossette should be overruled because it “cannot be reconciled with the strong weight of our precedent.” He argues that Gentile is wrong “to the extent that it allows for a direct claim in the dilution context when the issuance of stock does not involve subjecting an entity whose voting power was held by a diversified group of public equity holders to the control of a particular interest….”

Court of Chancery Decisions

Marino v. Patriot Rail Company LLC. This Court of Chancery opinion is noteworthy for providing the most detailed historical analysis, doctrinal underpinning and legislative exegesis of the statutory scheme that requires corporations under certain circumstances to provide advancement to former directors and officers that has come along in many years. The decision also explains why companies are barred from terminating such advancement for former directors and officers unless certain prerequisites are satisfied. An overview of this decision previously appeared on these pages.

In Re Trulia Inc. Stockholder Litigation.  This Court of Chancery decision has been the subject of such extensive commentary that virtually every reader of this blog has already read about it. This decision sharply curtailed (but did not entirely eliminate) the viability of stockholder class actions based on claims that insufficient disclosures were made in the context of a challenged merger. This decision was issued in January 2016. The Chancery Daily reports that the number of lawsuits filed in the Delaware Court of Chancery during the year 2016 subsequently declined substantially. Of course, some of these disclosure suits might have been filed in other states during 2016. Extensive expert commentary is available at this link, including from Professor Stephen Bainbridge, a good friend of this blog and a nationally prominent corporate law scholar often cited in Delaware court opinions addressing corporate law issues.

Amalgamated Bank v. Yahoo! Inc. This opinion provides a treasure trove of corporate law jewels. Those who need to keep abreast of this area of the law should read this scholarly 74-page gem. This decision will likely be cited often, and it belongs in the pantheon of seminal Delaware decisions because it is the first opinion to directly and comprehensively discuss directors’ obligations to produce electronically stored information (ESI) in connection with a stockholder’s request for corporate books and records pursuant to DGCL Section 220. The court also required the production of relevant personal emails of directors and officers from personal email accounts. Additionally, the court provided exemplary guidance in how to fulfill fiduciary duties when considering and approving executive compensation proposals. A synopsis of the case appeared on these pages.

Though not related in any way to my recommendation that this opinion is a must-read, as an added bonus, at page 20, the court’s opinion cited to a law review article recently co-authored by yours truly in which it was argued that ESI should be included within the scope of DGCL Section 220.

Obeid v. Hogan. This Court of Chancery opinion will be cited often for fundamental principles of Delaware corporate and LLC law, including the following: (1) even in derivative litigation when a stockholder has survived a motion to dismiss under Rule 23.1, for example where demand futility pursuant to DGCL Section 141 is in issue, the board still retains authority over the “litigation assets” of the corporation, and if truly independent board members exist or can be appointed to create a special litigation committee (SLC), it is possible for the SLC to seek to have the litigation dismissed under certain circumstances; (2) if an LLC Operating Agreement adopts a form of management and governance that mirrors the corporate form, one should expect the court to use the cases and reasoning that apply in the corporate context; (3) even though most readers will be familiar with the cliché that LLCs are creatures of contract, the Court of Chancery underscores the truism that it may still apply equitable principles to LLC disputes; (4) a bedrock principle that always applies to corporate actions is that they will be “twice-tested,” based not only on compliance with the law, such as a statute, but also based on equitable principles. This opinion is also noteworthy because it provides a roadmap for how a board should appoint an SLC with full authority to seek dismissal of a derivative action against a corporation. Additional highlights about this decision were previously noted on these pages.

Medicalgorithmics S.A. v. AMI Monitoring, Inc. This opinion earns a place among my annual list of noteworthy cases for its counterintuitive finding that a non-signatory was bound by the agreement at issue. Although other Delaware opinions have found that non-signatories were bound by the terms of an agreement, in this decision, the non-signatory was an affiliate of the signatory, and was controlled by the signatory; moreover, the agreement applied to affiliates. Additionally, the non-signatory also accepted the benefits of the agreement. See generally provisions of the Delaware LLC Act that bind non-signatory members of an LLC Operating Agreement to the terms of that agreement, and amendments by a majority of members that do not include the non-signatory. A prior overview of this case appeared on these pages.

Bizzarri v. Suburban Waste Services, Inc. This decision should be read by all those who advise directors or their corporations on what corporate records a director is entitled to–or not. This opinion provides an excellent recitation of the many nuanced prerequisites for demanding corporate books and records and when the otherwise unfettered right of directors to corporate records can be circumscribed and restricted. In addition to being noteworthy for providing corporations with defenses to demands for corporate records from directors and stockholders, this ruling explores the types of data that one can demand in connection with asserting the proper purpose of valuation of an interest in a closely-held company. A fuller discussion of this case appeared previously on these pages.

Larkin v. Shah. This Court of Chancery decision should be read by those interested in one of the most pithy restatements in any recent opinion of basic corporate governance principles such as the: (1) articulation of the fiduciary duties of directors; (2) presumption of the BJR as a standard of review; (3) when the BJR applies; and (4) how the BJR is rebutted. This opinion also provides an eminently clear articulation and application of the various permutations of one-sided or both-sided controlling stockholder transactions, and what standard of review applies in those circumstances, as well as the standard that applies in this case, where there is no controlling stockholder, but there is stockholder approval. An overview of the opinion appeared previously on these pages.

Supplemental Bonus: For the last twenty years, I have published a bimonthly column on legal ethics for the American Inns of Court. Because of the importance of legal ethics, which of course apply generally to the corporate and commercial litigation focus of this blog, and in particular in light of a controversial proposal by the ABA to amend the Model Rules to make it unethical to oppose, notwithstanding good faith religious reasons, certain behavior that until a few months ago was completely legal, I include a link to my recent article that quotes the views of nationally prominent legal scholars on a new ABA rule of professional conduct.

In addition, in honor of the passing in 2016 of U.S. Supreme Court Justice Antonin Scalia, I include a link to highlights that appeared on these pages of a concurrence by Justice Alito and Justice Thomas in the recent Caetano case that emphasizes the importance of the natural right of self-defense and in which those members of this country’s highest court rebuke Massachusetts’ highest court for flagrantly ignoring the clear authority expressed in the U.S. Supreme Court decisions in Heller and in McDonald regarding each person’s natural right to self-defense.

Narayanan v. Sutherland Global Holdings Inc., C.A. No. 11757-VCMR (Del. Ch. July 5, 2016). This Delaware Court of Chancery opinion addressed: (1) Whether separate sources of indemnification, including the company’s bylaws and an indemnification agreement, must be read together or separately; (2) Whether the plaintiff-director served the entity at the request of the company or for his own personal benefit; and (3) Whether the court should delay granting the request for fees, and fees-on-fees, until after the court determines that the company is liable for those fees. Each of the issues was decided in favor of the plaintiff-director.

Brief Overview:

Although Delaware entities were involved, many of the activities giving rise to this case occurred in India. One of the developments that precipitated the litigation by the plaintiff-director, is that upon his retirement, the company did not honor its alleged obligation to buy his shares. The plaintiff-director took legal action to obtain payment for his shares. The initial action was filed in federal court in New York and the Company filed counterclaims. The Company also filed a criminal complaint against the plaintiff-director in India alleging breach of duties.

Basis for Advancement:

The three instruments on which the claims for advancement are based are: (1) The certificate of incorporation; (2) bylaws, and (3) indemnification agreement. After making a demand and attaching an undertaking, the complaint in this matter was filed on November 30, 2015. It is noteworthy that the trial was held within 70-days after the complaint was filed, and this 44-page opinion was issued promptly thereafter.

Holdings:

(1) The court held that the bylaws are a separate and independent source of indemnification and advancement that do not require cooperation even though other documents might have that as a condition; (2) The controller of the company requested that the plaintiff-director serve in both entities involved in this matter and that satisfied any prerequisites for advancement; and (3) There is no further reason to delay vindicating the right to advancement notwithstanding other issues that have yet to be adjudicated.

Legal Analysis:

DGCL Section 145 governs the advancement issues in this case. The court observed the truism that a corporation has discretionary authority to provide indemnification under subsections (a) and (b), as well as advancement under subsection (e), but must provide indemnification in certain circumstances pursuant to subsection (c).

Section 145(f) makes clear that the indemnification and advancement rights under the DGCL are not exclusive of any additional indemnification and advancement rights a corporation chooses to provide in a separate instrument. The court cited to other recent decisions in which the court recognized that there could be several separate and independent sources of advancement. See Marino v. Patriot Rail Company, 131 A.3d 325, 332 (Del. Ch. 2016), highlighted on these pages here, as well as Charney v. American Apparel, Inc., 2015 WL 5313769 (Del. Ch. Sept. 11, 2015), highlighted on these pages here. Charney stands for the proposition that unavailability of advancement under one source of rights does not foreclose the possibility of advancement under another.

Exception to Rule that Multiple Contracts Construed Together

The court addressed the principle that when multiple contracts are signed together as part of a single transaction, those contracts are often interpreted together, apart from any explicit incorporation by reference. Namely:

“The principle that all writings which are part of the same transaction are interpreted together also finds application in the situation where incorporation by reference of another document may be inferred from the context in which the documents in question were executed,” in the absence of any contrary intention. See Slip Op. at 29 and n.77 (citing 11 Williston on Contracts § 30:26 (4th ed. 1999)).

Notwithstanding the foregoing principle, the court emphasized the exception to the rule which is “in the absence of evidence to the contrary,” which applies in this case. Compare a very recent advancement decision in Aleynikov v. The Goldman Sachs Group, Inc., highlighted on these pages, in which the Court of Chancery discussed the doctrine of in pari materia, in connection with reading the separate bylaws of a parent company and its subsidiary in a consistent manner.

After reciting the basic principles of contract interpretation, the court held that under the circumstances present, the bylaws and the separate indemnification agreement were independent sources of advancement rights. The court found that based on the testimony and evidence at trial, that the plaintiff-director served at the request of the person who was the controlling stockholder, chairman and CEO – – which the court viewed as tantamount to a request by the corporation. That controlling stockholder, chairman and CEO had apparent and actual authority to direct employees and to bind the company. Therefore, that fact satisfied the requirement in the bylaws that the company request plaintiff-director to serve in his capacity.

A Determination on Exact Amount of Fees:

The court expressed the view oftentimes repeated in recent advancement decisions that a proceeding to determine the right to advancement is not the appropriate time to dispute the precise amount of fees, and that in an advancement proceeding, the court will not inject itself as a “monthly monitor of the precision and integrity of advancement requests.” See footnote 93.

In addition, the court was satisfied that plaintiff-director’s counsel segregated as best as possible the unrecoverable fees from his affirmative claims in New York as compared to the defense of the counterclaims which were subject to advancement.

Procedure for Payments Going Forward:

The court imposed an order requiring that the parties follow the framework and procedures for monthly requests for fees, and any disputes of same, detailed by the court in the case of Danenberg v. Fitracks, Inc., 58 A.3d 991, 1003-04 (Del. Ch. 2012).

The Delaware Court of Chancery’s opinion in Marino v. Patriot Rail Company LLC, C.A. No. 11605-VCL (Del. Ch. Feb. 29, 2016), is noteworthy for providing the most detailed historical analysis and doctrinal underpinning for the legislative scheme that requires corporations under certain circumstances to provide advancement to former directors and officers, that has come along in many years. The decision also explains why companies are barred from terminating such advancement for former directors and officers unless certain prerequisites are satisfied.

Basic Facts

Although the factual background has many moving parts, for purposes of this short blog post that focuses on the legal analysis, the basic facts include a former chairman, president and CEO who had a controlling interest in the company involved. While a lawsuit was pending against the company by a former potential merger partner, the company was sold and an allegation was made that money from the sale was diverted in a manner that would make it difficult for the creditors to collect in the event of a judgment. After obtaining a judgment in the underlying suit that was pending prior to the sale, the creditor attempted to modify the judgment to add the former chairman as an individual party.

The former chairman sought advancement to cover the legal fees to defend against the efforts to add him as an individual party and to defend efforts to collect against him as a judgment debtor.

Legal Analysis

This opinion provides one of the “deepest dives” into legislative history and the policies underpinning advancement rights under Section 145(e); Section 145(f) and Section 145(j) of the Delaware General Corporation Law this writer ever recalls. This opinion also provides practical assistance for those handling this common form of corporate litigation.

In sum, Section 145(e) authorizes advancement; Section 145(j) suggests the extent to which a covered person’s indemnification and advancement rights for actions taken during the person’s period of service continued after the person ceased to serve; and Section 145(f) limits a corporation’s ability to cause a covered person’s rights to terminate after the person has served in reliance upon them. The court noted that Section 145(e) is permissive and therefore a corporation is free to limit the terms of advancement and even preclude advancement entirely at the outset.

The distinction in 145(e) between current and former directors and officers was not intended to do anything other than underscore the ability of current directors and officers to receive advancement if an undertaking is provided, and not be presumed to be engaged in self-interested transactions. See generally DGCL Section 144. Compare: principle of corporate actions being “twice tested.” See, e.g., footnotes 11 and 13.

The court refers to Section 145(j) as the “Continuation Clause” which requires an explicit opt-out before the advancement rights of a former director and officer can be terminated. So, although subsection (e) makes advancement permissive, once it is provided, this provision is mandatory to the extent that it prohibits termination of coverage for former directors unless this provision is satisfied.

The court explained that under the Continuation Clause in subsection (j), “the only way that a covered person loses coverage after having ceased to be a director is if the source of the coverage otherwise provided when authorized or ratified.” (emphasis added.)

By comparison and consistent with the Continuation Clause, the court explained that section 145(a) grants authority to a corporation to indemnify a person who “is or was” a director for actions that they took while a director. The “was” compliments the default rule of the Continuation Clause which states that unless the indemnification or advancement right specifies otherwise, coverage for actions taken while in a covered capacity continues after the person “has ceased” to serve in the covered capacity. Section 145(a) addresses whether an individual became involved in the litigation “by reason of” the individual’s service in a covered capacity.

Section 145(b) authorizes indemnification for actions by or in the right of a corporation and includes parallel usages of the words “is or was.”

The court next addressed Section 145(f) which “answers the more serious question of whether a corporation can cause those rights [of advancement] not to continue by altering or eliminating them.” The court refers to Section 145(f) as the “No Termination Clause.” It was added as an amendment to the statute in 2009 as a result of a decision which was superseded by this new statutory provision to negate the court ruling that allowed the corporation to terminate coverage of a former director after the former director left this position. This No Termination Clause provides prerequisites that must be satisfied before such coverage can be terminated.

The court discusses the policy reasons and doctrinal underpinning of the importance of providing advancement to former directors and officers for actions taken during their periods of service. Advancement has often been described as an important corollary to indemnification because of their use as inducements for attracting key individuals to perform corporate service. The court explained that the statute was designed to counter the natural human inclination to deny advancement to former directors and officers perceived to have harmed the corporation. Still, the court explained that: “by establishing a statutory presumption of continuing coverage for actions taken during the period of service, the Continuation Clause and the No Termination Clause ensure that the public policy interest prevails, unless the individuals know when they choose to serve that their rights will terminate or can be cut off later.” See Slip op. at 30.

The court explained why some actions that were taken after the resignation of the chairman in his personal capacity in this case would not be covered, but the actions taken while he was the chairman would be covered.

There are many parts of this opinion that make it required reading for anyone interested in this area of Delaware corporate law. One of the key parts of this opinion at pages 39 and 40 should be consulted not for its uniqueness but because it describes a detailed procedure that the parties and their counsel must follow to address disputed claims for advancement. This procedure is similar to prior procedures used in Chancery and will inevitably be needed to address disputes as this opinion is applied to specific bills that are received on a monthly basis and that will engender disagreement about which bills are properly covered pursuant to this opinion and which are not.

N.B.: This decision should be closely compared and contrasted with the Delaware Court of Chancery’s opinion styled Charney v. American Apparel, Inc., C.A. No. 11098-CB (Del. Ch., Sept. 11, 2015), which rejected the advancement claims by a former chairman and CEO (and founder), based on the provisions for advancement in the company’s charter and in an indemnification agreement. That ruling was highlighted on these pages.