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).