A recent decision by the Complex Commercial Litigation Division of the Delaware Superior Court in Winshall, et al. v. Viacom International, Inc., C.A. No. N15C-06-137 EMD CCLD (Del. Super., Feb. 25, 2019), ruled that a claim for indemnification was not ripe until a final adjudication, after appeal, was decided.  In a matter involving a claim for indemnification for attorneys’ fees based on a finding of a breach of a merger agreement by the Court of Chancery, which was affirmed by the Delaware Supreme Court, the Superior Court held that a subsequently filed indemnification claim was not barred by the statute of limitations because the claim did not become ripe until the affirmance by the Delaware Supreme Court. See Slip op. at 17-19.

The indemnification claim for “losses” which was defined in the agreement to include attorneys’ fees, was based on the Court of Chancery’s prior finding of a breach of agreement. The court also discussed several rebuttals to a statute of limitations argument and how they applied to the facts of this case. Id. at 22.

Compare a recent decision highlighted on these pages which held that the statute of limitations of three-years for a breach of contract claim for indemnification did not begin to accrue until the claim for indemnification was rejected.

A recent Delaware decision is noteworthy because of its clarification of when the statute of limitations begins to run in connection with the alleged breach of a contractual indemnification clause.

The Superior Court ruled that an indemnification claim for environmental remediation liability accrued when the seller refused to indemnify the buyer–and not when the buyer discovered the contamination on which the indemnification claim was based. See Cooper Industries v. CBS Corp., C.A. No. N18C-03-175-WCC-CCLD (Del. Super., Jan. 10, 2019). The agreement at issue provided that the duty to indemnify was triggered when the buyer sustained losses. See footnote 58 and accompanying text, citing cases for the position that the breach does not occur until the claim was rejected. In light of that finding, suit was filed within the three-year SOL for contract claims. A more careful review of the detailed facts described in the court’s opinion is warranted for those who need to be familiar with the nuances of the latest iteration of Delaware law on this topic.



A common theme in cases before the Delaware Court of Chancery involves a buyer and a seller of a business disagreeing about some aspect of the deal.  So it was in the matter of Great Hill Equity Partners IV, L.P. v. SIG Growth Equity Fund I, LLLP, C.A. No. 7906-VCG (Del. Ch. Dec. 3, 2018).

This opinion weighs in at 153-pages and provides extensive factual details especially in the first 90-pages.  There were several prior decisions in this case highlighted on these pages, that provide more background information. 

Key Issues:

The key issues in this post-trial decision relate to whether fraud was proven, and whether damages were established in an amount that exceeded the cap on indemnification claims provided in the agreement of the parties.  In addition to allegations of breach of the representations and warranties in the agreement, the case included allegations of fraud, primarily relating to the knowledge of the sellers regarding excessive chargebacks that endangered the business model of the seller.

The legal analysis begins with a review of the claims for indemnification, as well as the argument that due to alleged fraud, the damages should not be limited to the escrow funds established by the merger agreement.  See page 91.

Key Takeaways:

·     Notably, the court explains that in Delaware the elements of fraud and “fraud in the inducement” are the same.  The court expounds at length on the various nuances and subtleties of such claims.  See Slip op. at 93 to 97.  The court applies those elements and nuances of the claims in an analysis that extends from page 97 to page 134.

·     A thorough analysis of the indemnification claims begins at page 134, and the key holdings on the indemnification claims are found at pages 147 to 150.

·     Although many indemnification claims and merger agreements have common themes, naturally their precise terms differ.  Many indemnification provisions have a cap on damages related to those claims.

Highlights of Court’s Holdings:

In this case, the court read the indemnification provisions to provide exclusive remedies only for specific types of claims, but the clause excluded damages based on fraud, for which the agreement did not provide a cap or limitation.  That is, the court explained that when the contract is viewed as a whole, the indemnification language involved exempts fraudsters from the benefits of the negotiated limits on liability.  See page 146 (emphasis on the word “fraudsters” in original).

The court also explained that the indemnification provision was part of a bargained-for liability structure that was intended to limit losses only from breaches of representations and warranties, that would be paid for from a fund that was created from the sale proceeds.

Damages for fraud were not limited to those referenced in the indemnification clause.  The court explained that this exclusion in the indemnification clause allowed an action to be brought against tortfeasers for damages without the limitations of the indemnification clause.  See pages 149 to 150.

SUPPLEMENT: In a recent bench ruling, the Court rejected an argument that the indemnification clause could be used as a broad liability cap, such as for a claim that the payment provision of an agreement of sale was breached–as opposed to a breach of the representations and warranties clause. See Glidepath, Ltd. v. Beumer Corp., C.A. No. 12220-VCL (Del. Ch. Nov. 26, 2018)(Transcript at 4-6). The court referred to the Curo case in the transcript ruling. The advancement aspects of that case were highlighted on these pages. (Yours truly represents Glidepath, Ltd. in a pending earn-out matter.)

The Delaware Court of Chancery in Daugherty v. Highland Capital Management, L.P., C.A. No. 2017-0488-SG (Del. Ch. June 29, 2018), primarily addressed the issue of laches and equitable tolling that constituted the majority of the 29-page decision, but the last two pages relating to indemnification are the most memorable parts of the opinion.  The procedural history of the case is relatively lengthy and somewhat involved.

The most noteworthy aspect of this case is the indemnification claim. The parties in this case were involved in lengthy litigation in Texas after which the party seeking indemnification brought suit in Delaware.  One of the issues was whether it took too long to proceed in Delaware.  The indemnification claim was not barred by laches based on an extensive analysis by the court of the facts of the case.

The most widely applicable bullet points from this case regarding indemnification are the following:

  • “A cause of action for indemnification accrues when the officer or director entitled to indemnification can be confident any claims against him have been resolved with certainty.” See footnote 120 (quotations omitted).
  • The court explained that the “certainty” required as a prerequisite for indemnification “requires the resolution of any appellate review.”
  • As a general matter, “adjudicating indemnification claims piecemeal is highly inefficient.” See footnote 122.
  • The court also rejected the defense that the indemnification claims related to personal contractual obligations as opposed to acts performed in the name of the entity against whom indemnification was sought, but the court found at the early pleading stage it was reasonably conceivable that the claimant was acting in his position as an employee of the entity with respect to at least some of the claims defended in the Texas litigation for which he is seeking indemnification.

The Delaware Court of Chancery in a recent opinion allocates the precise amount of fees payable, as a result of a prior indemnification ruling, in light of the total amount of fees incurred by various parties and proceedings that were not all subject to indemnification obligations. The decision in Meyers v Quiz-Dia LLC, et al., C.A. No 9878-VCL (Del. Ch., Mar. 16, 2018), needs to be read by anyone who wants to know how, according to Delaware law, the exact of amount of fees will be allocated when indemnification is owed to less than all the parties, and for fewer than all of the underlying lawsuits, for which fees have been incurred and that may not be easily separated for purposes of determining what amounts are covered by an indemnification obligation. Several of the many prior Chancery decisions in this case have been highlighted on these pages and should be referred to for detailed background facts and procedural history.

After 13 years of highlighting Delaware decisions on indemnification and advancement rights of officers and directors, and publishing an annual book chapter on those cases for several years, this is the most helpful decision that I recall for its analysis of how to determine the allocation and exact amount of fees incurred and payable among multiple parties and different lawsuits, when not all the parties and not all the underlying litigations are covered by indemnification.

Noteworthy Aspects of Indemnification Law from This Decision

  • The court addresses the rare issue of a subrogation right to indemnification pursued by one of the companies involved that paid the fees for the officers and directors based on secondary liability for indemnification. [The company with the primary indemnification obligation initially refused to pay.] This opinion explains the prerequisites that need to be satisfied for one seeking reimbursement via subrogation of fees paid pursuant to a secondary obligation to indemnify. One of the requirements for subrogation in this context is that the payor not be a “volunteer” though that term in this context is not strictly defined and may be satisfied by the desire of a company to support its management.
  • Chancery Rule 88 was the procedural mechanism that the parties resorted to, in connection with the motion to quantify the exact amount of fees, because the prior opinion in June 2017 establishing the right to indemnification, highlighted on these pages, did not determine the amount of fees due–and the parties could not agree on the amount or allocation. A total of about $552,000 (out of a total of about $785,000) was sought for the underlying litigations, and about $820,000 for “fees on fees” out of a total of about $1.9 million was sought in this latest ruling. [Yes, the “fees on fees” amount exceeded the total of fees incurred, and now sought, for the underlying lawsuits.]
  • Allocation of fees payable for the two indemnitees in this matter was  determined by the court to be controlled by a prior agreement among the parties to share the fees for the underlying litigations. See footnotes 56 to 59. The court reasoned that the two persons entitled to indemnification pursuant to the prior ruling of the court, Smythe and MacDonald, had previously agreed that they would be allocated 20% of the fees in the underlying lawsuits. The company seeking subrogation on their behalf in this instant decision, therefore, was not entitled to seek reimbursement for more than the 20% that Smythe and MacDonald had previously agreed to be apportioned to them in a separate allocation agreement. The net amount awarded in this decision was about $145, 00o, therefore, instead of the more than $700,000 sought.
  • The allocation of “fees on fees” was based on a slightly different analysis. Citing to prior decisions that applied the principle of “reasonably proportionate to the level of success” to an award of “fees on fees”, and in light of the request in this matter for about $820,000 out of the $1.9 million in “fees on fees” incurred for both covered and uncovered parties, or 39% of the total, the court explained that based on the total number of initial claims and the amount of work on the successful claims, 50% success was the appropriate starting point for allocation of fees on fees in this case. The court then used the 20% allocation explained above for the underlying litigation and: “Multiplying the two percentages results in a fees-on-fees percentage of 10%.” Applying that percentage to the “base amount”, results in a fee award of $125,000.
  • The court compared that award with what the court described as “its experience” that briefing on summary judgment in this case “likely would have cost between $100,000 and $200,000”, and because the success achieved in this case could have been achieved via summary judgment motion, the court determined that the amount awarded was reasonable.
  • Pre-judgment interest was also awarded and the discussion about the date when that interest starts is worth reading verbatim. See footnotes 67 to 70 and accompanying text.

In a recent Delaware Chancery opinion, the court clarified that a corporate officer who was “successful on the merits or otherwise in the defense of an action” need not show good faith in order to be entitled to mandatory indemnification.  Meyers v. Quiz-Dia LLC, C.A. No. 9870-VCL (Del. Ch. June 6, 2017). See also DGCL Section 145(c). Several prior Delaware decisions in this case, which provide background details, have been highlighted on these pages.

Key Aspects of the Decision:  Many cases highlighted on this blog have addressed the various permutations of indemnification and advancement for officers and directors, so this decision will be limited to the nuances that make this ruling noteworthy (and “blog-worthy”).

The court explained that when mandatory indemnification is provided to the fullest extent permitted by applicable law, that includes the fees incurred to investigate claims  prior to a lawsuit.  In particular, in this matter, former officers had reason to believe that they would be sued, and thus began an investigation of those potential claims in order to prepare their defense.  Fees for that investigation are included in the indemnification rights to which they were entitled.

Although the indemnification provisions in this case were in the LLC context, because the language used in the LLC documents mirrored DGCL Section 145(c), the case law and statutory interpretation approach that construed that language was applicable.

The phrase in Section 145(c) that provides mandatory indemnification when a former director or officer has been “successful on the merits or otherwise in defense of any action . . ..”, has been interpreted very broadly to include almost anything short of a complete loss.  It permits an indemnitee to be indemnified as a matter of right even if the success includes, for example, dismissal without prejudice of a federal action – – and the same claims are later asserted again in a state court action.

Notably, the good faith requirement does not apply under Section 145(c) to a director or an officer who is “successful” in defending a claim.  See footnotes 39 and 40 and accompanying text.

As we have written on these pages for several years, in my capacity as the Chair of the American Bar Association’s Advancement and Indemnification Subcommittee of the Business Law Section’s Corporate Litigation Committee, yours truly co-authors a chapter each year that highlights the most noteworthy court decisions on advancement and indemnification of directors and officers, as part of an annual publication of the American Bar Association entitled: Recent Developments in Business and Corporate Litigation. The 2017 edition was recently published, and the chapter this year is co-authored by yours truly along with litigators who work with me in the Delaware office of Eckert Seamans, including: Gary Lipkin, Aimee Czachorowski. Even though we do a survey of cases on this topic from around the country, the majority of the decisions have been from Delaware and typically are highlighted on these pages as well.

An associate in the Delaware office of Eckert Seamans prepared this overview.

The Court of Chancery opinion in Horne v. OptimisCorp, C.A. No. 12268-VCS (Del. Ch. Mar. 3, 2017) explores Delaware’s indemnification provisions.

Background:  Plaintiff William Horne (“Horne”) brought an action for indemnification for fees and expenses against OptimisCorp (the “Company”).  Horne’s fees stemmed from an action brought against him by the controlling stockholder of the Company, Alan Morelli (“Morelli”), which alleged Morelli was wrongfully removed from the board of directors and as the Company’s CEO.   After a six-day trial, the Court of Chancery found that Morelli failed to prove any of his claims.  Horne then filed for indemnification of his expenses incurred to defend the action brought by Morelli.  The Company opposed those expenses, arguing that they were not incurred by reason of the fact that Horne was an officer of the Company, and also that the amount of fees was unreasonable.

Analysis:  The court began its analysis by quoting DGCL Section 145(c), which states in part that present or former officers and directors that have been successful on the merits or otherwise shall be indemnified against expenses (including attorneys’ fees) actually and reasonably incurred.

To determine whether Horne can satisfy the “by reason of the fact” standard, the court explained that only a nexus or causal connection between the underlying proceedings and one’s official corporate capacity is needed.  This test was easily met by Horne, because claims were brought against him for breach of fiduciary duty in his role as the Company’s CFO.  A claim for aiding and abetting was also brought “by reason of the fact” that Horne was the CFO, because the underlying conduct was consistent with his fiduciary duties.

Moving to reasonableness of the fee amount, the court stated that it considers three factors: (1) whether the expenses were actually paid; (2) if the services were in good faith, thought prudent, and appropriate by competent counsel; and (3) the rates charged were comparable to similar circumstances.

The Company only challenged the second factor.  The Company asserted that Horne’s litigation strategy racked up a considerable amount in fees, but was largely abandoned prior to trial.  The court remarked that it would review a litigation strategy only if those decisions are “unmistakably unreasonable.”  And the court will not engage in a line-by-line review of bills.  Therefore, the court rejected this argument in whole and award Horne with full indemnification.

The Delaware Court of Chancery recently addressed an issue of importance to directors of companies as well as those interested in corporate litigation. In the case of Dore v. Sweports, Ltd., C.A. No. 10513-VCL (Del. Ch. Jan. 31, 2017), the court addressed situations where a director conceivably could be indemnified for fees incurred in pursuing an affirmative claim against the company as compared to the typical situation where indemnification is sought for reimbursement of fees incurred to defend a claim successfully. This opinion also provides an excellent overview of basic indemnification principles based on DGCL Section 145.

Background: The various lawsuits that gave rise to this indemnification action were based in large part on the attempts of the law firm of Sweports, Ltd. to collect legal fees.  One of the partners in the law firm was on the board of the company and also had to defend himself when the company filed counterclaims against the plaintiffs that were unsuccessful.  The lawyers who were seeking to collect their fees against the company ultimately commenced involuntary bankruptcy proceedings against the company.  The Delaware lawsuit was initiated after the lawyers for the company were largely successful in their lawsuits against the company to collect fees, and in defending claims against them made by the company.

Indemnification Principles

Section 145(a) of the Delaware General Corporation Law (DGCL) allows for indemnification in an action “other than by or in the right of the corporation.”  Section 145(b) provides for indemnification in an action “by or in the right of the corporation.”  Section 145(c) mandates that a Delaware corporation indemnify an individual who was sued by reason of the fact that the individual served as a director or officer if the individual was successful on the merits or otherwise in defending against the claim.  Although Section 145(c) only covers directors and officers, 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.

When assessing an indemnification claim, typically the first inquiry is whether the expense has been incurred in connection with a covered proceeding.  A covered proceeding is a civil, criminal, administrative or investigative action in which the individual seeking indemnification was a “party or threatened to be made a party by reason of the fact that the individual is or was a director, officer, employee or agent of the corporation.”  The corporation has the burden of proof when it has provided individuals with mandatory indemnification to the fullest extent of the law, to prove that an individual is not entitled to indemnification.

Typically, step two in the analysis after it is determined that a proceeding is covered, is to analyze whether the expenses incurred “were actually and reasonably incurred” in connection with the proceeding.  The court determined that only a small fraction of the expenses sought were actually incurred, and some of the expenses claimed were inflated.

The key aspect of this 58-page opinion of the Delaware Court of Chancery that makes it notable is that it addresses those situations in which an affirmative claim is indemnifiable, as compared with the more common claim for indemnification based on fees and expenses incurred to defend a claim brought against a director.

In this opinion, the Vice Chancellor explained that “it is conceivable that indemnification might be warranted for preemptive litigation involving personal claims that sought to negate a threatened breach of fiduciary duty claim . . ..”  The court explained that “. . . indemnification might be available if disposition of the personal claims would determine definitively whether the plaintiffs had breached their fiduciary duties.”  Typically, indemnification claims are not allowed for personal claims that are not brought “by reason of” the director’s duties, for example, in connection with an employment agreement that does not involve the exercise of judgment, discretion, or decision-making authority on behalf of the corporation.  The court referred to a prior Delaware decision in which indemnification was permitted for an intervenor where collateral estoppel might have barred a claim in a subsequent proceeding.

In this case, the plaintiffs chose to pursue their claims based on pure breach of contract theories untethered to their conduct as fiduciaries of Sweports.  Although they could have proceeded in a different manner, they only proceeded on a breach of contract theory.  The contract claims were personal to the plaintiffs in their capacity as lenders, creditors and guarantors – – which did not have a sufficient nexus implicating corporate duties.

The court did allow a portion of the fees and expenses incurred to defend against counterclaims which plaintiffs successfully defended, as well as related claims that were defensive in nature.  Finally, because the plaintiffs were only successful to a small degree in their claims seeking indemnification, the court only allowed a small percentage of the “fees on fees” that were incurred in connection with their effort in this case to collect fees.

Postscript: For the past several years, I have co-written a chapter of a book published by the ABA that compiles key court decisions from Delaware and around the country regarding both advancement and indemnification of corporate officers and directors, for example, pursuant to DGCL section 145.

An Eckert Seamans associate prepared this overview.

The Court of Chancery issued two opinions relating to a web of advancement and indemnification claims brought on behalf of multiple, separate plaintiffs: (1) Meyers v. Quiz-Dia LLC, C.A. No. 9878-VCL (Del. Ch. Jan. 9, 2017); and (2) Meyers v. Quiz-Dia LLC, C.A. No. 9878-VCL (Del. Ch. Jan. 10, 2017).  A previous blog post summarized the Chancery Court’s December 2, 2016 order to stay certain indemnification claims pending a determination as to arbitrability in the same case.

The January 9, 2017 Memorandum Opinion:

In the January 9, 2017 Memorandum Opinion, the Court concluded from an analysis of contractual drafting history that the plaintiffs were not entitled to advancement and indemnification.  This decision is important because it addresses the relatively rare instance in which the Court will consider extrinsic evidence.  Of cautionary note, draft agreements with attorney comments were discoverable under the circumstances.

Background: An in-depth overview of the background of this litigation can be found here.  The plaintiffs, previously affiliated with a non-party parent entity, Quiznos, brought suit asserting entitlement to advancement and indemnification from the defendant subsidiaries pursuant to multiple agreements.  The parties filed cross-motions for summary judgment regarding the question of whether the defendants assumed advancement and indemnification obligations.  The Court explained that the claims turned on whether the defendants assumed the obligations pursuant to a post-restructuring Assignment, Assumption, and Release Agreement (the “Assignment Agreement”).

Court’s Analysis: The Assignment Agreement was subject to New York law.  Under New York law, contracts should be construed in accordance with the parties’ intent.  To determine whether the parties intended for defendants to assume the obligations, the Court conducted an extensive analysis of the drafting history of the Assignment Agreement.

The Assignment Agreement was prepared during the restructuring negotiations and contained two separate deal points: (1) a release of any claims that the post-restructuring entities might have against the sell-side parties, and (2) the assumption and continuation of indemnification rights.  The parties drafted the Assignment Agreement late in the restructuring process after negotiating multiple contracts, including a principal restructuring agreement.

Because the Assignment Agreement was ambiguous as to which entities were to assume the obligations, the Court was permitted to consider extrinsic evidence regarding the parties’ intent.  Thus, the Court reviewed deposition testimony and considered the parties’ multiple agreements.  The Court reviewed draft versions of the agreements, including attorney comments, and it read the documents as a whole.

Conclusion: After considering drafting history, context provided by the multiple agreements, and deposition testimony, the Court held that the defendants did not assume the indemnification and advancement obligations. Therefore, the Court granted summary judgment in the defendants’ favor as to certain non-stayed claims left in the case.


The January 10, 2017 Memorandum Opinion:

Background: The Court’s January 10, 2017 Memorandum Opinion addressed a motion to vacate its November 30, 2016 order dismissing certain indemnification claims as premature pending related litigation in Colorado (the “Colorado Action”).  The plaintiffs had advancement claims pending simultaneously in the Delaware court.

Parties’ Arguments: The moving plaintiffs argued that because the Colorado Action had been dismissed, and the dismissal was affirmed by the appellate court, there was a final disposition in the Colorado Action.  Therefore, the plaintiffs argued that their indemnification claims became ripe in Delaware.

Court’s Analysis: The Court explained that although the federal appellate court affirmed dismissal in the Colorado Action, the deadline to petition the U.S. Supreme Court for a writ of certiorari does not pass until March 13, 2017.  As long as the decision in the Colorado Action is not final, outstanding Delaware advancement claims were ripe.  However, when the decision in the Colorado Action becomes final, the Delaware advancement claim will be moot, and the indemnification claims will become ripe.

The Court reiterated that advancement and indemnification are distinct legal concepts.  A claim for advancement is a summary proceeding, and ordinarily, the Court would not await developments in another jurisdiction before adjudicating an advancement claim.  However, in the present action, questions had been raised about the ability of the Court to rule on the plaintiffs’ advancement rights, as the plaintiffs did not produce detailed invoices in support of their claims until after the discovery cutoff.  The Court also pointed out that the plaintiffs were well-off and another plaintiff was funding their litigation efforts.  Additionally, the plaintiffs’ legal representation was not compromised by the lack of advancement to date.  Therefore, the Court determined that the plaintiffs would not suffer harm if it withheld a decision on advancement and indemnification until it was clear whether the Colorado Action would proceed to the Supreme Court.

Conclusion: Citing its inherent authority to control its own docket, the Court denied the plaintiffs’ motion to vacate.  The Court explained that whether the plaintiffs had a right to advancement or indemnification would soon become clear pending a final determination in the Colorado Action.  Therefore, the Court stayed further outstanding advancement and indemnification claims in the interim.