We previously highlighted on these pages a Delaware Supreme Court decision in Hazout v. Tsang, that expanded the orthodox interpretation of a Delaware statute with the net result of making it easier to sue in Delaware an officer or director who has agreed to serve in that capacity for a Delaware entity. Now, readers have the benefit of an expanded article I wrote on the case that appears in the current edition of the national publication of the National Association of Corporate Directors, called Directorship.

Postscript: Professor Bainbridge graciously links to this post.

CITIphoto-Suzanne-Plunkett-150x150The difference between a direct claim by a stockholder against a corporation as compared to a derivative claim, is a subtlety that even the most astute corporate litigator cannot always easily discern. Many Delaware court opinions have addressed the nuances that distinguish between such claims–and to make it more interesting for everyone the Delaware Supreme Court has stated that some claims are both derivative and direct. This week, the Delaware Supreme Court addressed the issue again, considering a matter it accepted upon certification by the U.S. Court of Appeals for the Second Circuit.

In Citigroup Inc., et al. v. AHW Investment Partnership, et al., No. 641, 2015, 2016 WL 2994902 (Del. May 24, 2016), Delaware’s high court explained that because the claims did not involve corporate governance or fiduciary duty issues, that Delaware law did not apply to the direct versus derivative conundrum. Frank Reynolds of Thomson Reuters has a more detailed article about this case.

For those of us who follow the latest developments in the law of advancement claims for directors and officers, a recent transcript ruling should be of interest, due to circumstances not often addressed in advancement decisions that we have highlighted on these pages for the last decade. Courtesy of Kyle Wagner Compton of The Chancery Daily fame, we bring you highlights of a recent decision in the pending case of Eric Pulier v. Computer Sciences Corp., et al., C.A. No. 12005-CB, hearing (Del. Ch. May 12, 2016), heavily borrowing from the unparalleled reporting of TCD‘s indispensable coverage of all things Chancery. Based on what I have seen so far, this may warrant inclusion in my annual ABA book chapter in which I update each year with key decisions on advancement and indemnification. (The 2016 edition is available from the ABA.) A key issue addressed in this case was whether the claimant was an officer as that term is defined in the applicable bylaws.

TCD alerted us to the following highlights, which are in large part from Kyle Wagner Compton of TCD (though any errors are my own).

The issue was not the usual argument about whether the former officer was acting in a corporate capacity, but instead: whether plaintiff is in fact a “covered” or “indemnified” person subject to advancement and indemnification under defendant’s bylaws. The analysis depended in part on Nevada law, because defendant is a Nevada corporation, and in part on the wording of defendant’s bylaws regarding who qualified as a “vice president” or other officer.

The claimant was the founder and CEO of the acquired company, called ServiceMesh, which defendant — Computer Sciences — acquired for a few hundred million. Plaintiff was kept on to manage his former company as a division of the acquiring company, essentially continuing his pre-existing CEO role, and given the title of Vice President.  The plaintiff was not elected by the board of directors, and thus not entitled to advancement and indemnification under Computer Sciences’ bylaws. The acquiring company sued plaintiff for taking actions as a D&O of the acquired company before closing that weren’t discovered until after closing.  There are two potential bases for advancement: the acquired company’s bylaws for acts taken in the capacity of D&O of the acquired company before closing, and defendant’s bylaws for acts taken in the capacity of Vice President after closing.

Given the nature of his role, one might easily assume that one holding the title of Vice President would be considered an officer of the company.  There is other evidence, such as his being identified as a member of Computer Sciences’ “executive team.”  But Nevada law, which governed the application of the acquiring company’s bylaws, specifies that you can only be a corporate officer in a manner specified in the company’s bylaws, and Computer Sciences’ bylaws specify that officers must be elected by the board of directors.

Other claims, however, were governed by the former company’s bylaws which did not have that prerequisite of election by the board to qualify as an officer for purposes of advancement claims. The Chancellor concluded that five out of seven claims asserted against plaintiff related to acts taken as D&O of ServiceMesh, his prior company, and the court held that he was entitled to advancement for 80% of his expenses based on ServiceMesh’s bylaws.  Based on the prerequisites of the bylaws of the acquiring company controlled by Nevada law, however, the court held that the plaintiff was not entitled to advancement for post-closing acts where his only basis for advancement was under the Computer Sciences’ bylaws.

Takeaway:  This case exemplifies the risk of not being aware that notwithstanding: (a) one’s hiring as a consequence of an acquisition of a company that one founded; (b) assuming responsibility for the management of that business as a division of the acquirer; (c) performing the same types of duties performed as CEO before the acquisition; and (d) with a title like Vice President that is at least nominally an officer-like title, it is still possible based on the terms of a bylaw or other controlling document, to not qualify as an “officer” for purposes of advancement. Thus, those officers and directors who remain in the service of an acquiring company, and the lawyers who advise them, need to be aware of this issue.

Also courtesy of The Chancery Daily are links to the bylaws involved in this case. Amended and Restated Bylaws of Computer Sciences Corp., Feb. 7, 2012 and Amended and Restated Bylaws of ServiceMesh, Inc., Nov. 14, 2011.

Supplement: Keith Paul Bishop published an article about this case in The National Law Review, kindly linking to this post, and providing insights into the Latin roots of the word “vice” as a helpful supplement to the issue in this case about who qualified as a “vice president”.

POSTSCRIPT: Coincidentally, a somewhat similar issue was addressed at a hearing recently in a separate case before another member of the Court of Chancery. In Aleynikov v. The Goldman Sachs Group, Inc., C.A. No 10636-VCL (Del. Ch. April 28, 2016), after a hearing, the court took under advisement an advancement issue certified to it by the U.S. District Court for the District of New Jersey. The issue turned on whether the person seeking advancement, who was given the title of  Vice President by Goldman Sachs, was an “officer” as that term was defined for purposes of being entitled to advancement pursuant to the applicable governing documents. The recent Chancery hearing was the latest iteration of long-running litigation involving several courts in several states, as reported in Law360 in an article on April 28, 2016. We will be watching closely for the court to render its published opinion in this case, and we will be certain to provide highlights.

I have been asked to provide information about the following seminar on corporate law at Rutgers Law School-Camden:

The Rutgers Center for Corporate Law and Governance is presenting a conference on corporate compliance on Friday, May 20, 2016, from 8:30 AM to 3:30 PM, entitled New Directions in Corporate Compliance. The conference will take place at Rutgers Law School, 217 North Fifth Street, Camden, NJ 08102. Additional information and a link to register are available at:  http://cclg.rutgers.edu/event/new-directions-in-corporate-compliance-conference/

Yesterday’s Wall Street Journal featured a front page article about an apparently increasing number of CEOs of public companies who use their companies’ resources, and wield their companies’ resources as a sword, to advocate in their official corporate capacities to advance their favorite social agendas–or to oppose legislation on social policies that they disfavor. Courtesy of highly-regarded corporate law scholar Professor Stephen Bainbridge, we have citations to, and quotes from, a recent law review article by the Chief Justice of the Delaware Supreme Court, in which he reiterates a bedrock principle of Delaware corporate law that corporate directors and officers of for-profit Delaware companies “… must make stockholder welfare their sole end….” Leo E. Strine, Jr., The Dangers of Denial: The Need for A Clear-Eyed Understanding of the Power and Accountability Structure Established by the Delaware General Corporation Law, 50 Wake Forest Law Review 761, 767 (2015).

If a stockholder thought that a CEO of a public company was more focused on social activism than observing his or her duty to maintain a focus on maximizing shareholder wealth, one element of a claim would be the measure of damages. If a company is profitable “enough”, the CEO may “get a pass”. But the recent downward trajectory of the stock price of profitable companies like Apple, which recently lost about $73 billion in market value, and an unrelated petition of over one million people who are boycotting Target department stores due to their position on recent gender issues, may gain the attention of a different type of activist: plaintiffs’ lawyers who specialize in stockholder class actions.

SUPPLEMENT: Kevin LaCroix on his blog The D&O Diary, has a characteristically thoughtful analysis of this issue. Both he and Professor Bainbridge kindly linked to my blog post. The good professor also linked to additional commentary on this issue.

The Delaware Supreme Court recently ruled on the duties of directors of Delaware corporations who are appointed by particular stockholders. In OptimisCorp v. Waite, Del. Supr., No. 523, 2015, Order (April 25, 2016), Delaware’s high court issued a nine-page Order with several substantive footnotes that provide practical insights for those who need to know what the rights and obligations are of directors who are appointed, for example, by written agreement as a condition of an investment in a company. These members of the board are sometimes referred to as “blockholder directors”, as in a director appointed by someone who owns a block of stock.

The Order affirmed a 213-page opinion by the Court of Chancery that also explored the dark corners of “witness tampering”. See OptimisCorp v. Waite, C.A. No. 8773-VCP (Del. Ch. Aug. 26, 2015). Despite the affirmance of the result, the Supreme Court disavowed the Court of Chancery’s reasoning on the “super-director” theory, and neither endorsed the trial court’s view, nor expressed any controlling opinion, about the part of the lower court’s decision relating to the substance or agenda of a board meeting being selectively withheld from a particular director–especially when the stockholder who appointed that director might have exercised his majority power prior to the meeting to avert an ambush.

Nonetheless, for anyone who needs to know, or is interested in, Delaware law on blockholder directors, as well as witness tampering, this gem-filled ruling is useful for its latest iterations of the Supreme Court’s perspective on these topics. A few selected quotes from the decision follow:

  • “… we are reluctant to accept the notion that it vindicates the board‘s right to govern the corporation to encourage board factions to develop Pearl Harbor-like plans to address their concerns about the company‘s policy directions or the behavior of management. Rather, it has long been the policy of our law to value the collaboration that comes when the entire board deliberates on corporate action and when all directors are fairly accorded material information.8”
  • Footnote 8 is eminently quotable:

“See, e.g., Lippman v. Kehoe Stenograph Co., 95 A. 895, 899 (1915) (Each member of a corporate body has the right to consultation with the others and has the right to be heard upon all questions considered . . . .(citation omitted)); id. at 897 ([T]here is a deeper reason [for not permitting directors to act by proxy] based on the association of each director with each of the others, of which association none of the associates can divest himself while remaining a member. In other words, a director cannot authorize any one to act for him, because his associates are entitled to his judgment, experience and business ability, just as his associates cannot deprive him of his rights and powers as director.); Hall v. Search Capital Grp., Inc., 1996 WL 696921, at *2 (Del. Ch. Nov. 15, 1996) (Absent a governance agreement to the contrary, each director is entitled to receive the same information furnished to his or her fellow board members. (citation omitted)); see also J. Travis Laster & John Mark Zeberkiewicz, The Rights and Duties of Blockholder Directors, 70 BUS. LAW. 33, 35 (2015) (Delaware corporate law embraces a board-centric model of governance. This model expects that all directors will participate in a collective and deliberative decision-making process.); id. at 41 (Given that the DGCL allocates fundamental decision-making power to the board as a whole, and not to any individual director qua director, all directors must have the opportunity to participate meaningfully in any matter brought before the board and to discharge their oversight responsibilities. In more granular terms, directors must be afforded, at a minimum, (i) proper notice of all board meetings, (ii) the opportunity to attend and to express their views at board meetings, and (iii) access to all information that is necessary or appropriate to discharge their fiduciary duties, including the opportunity to consult with officers, employees, and other agents of the corporation.).”

  • “… we do not embrace the Court of Chancery‘s framework for analyzing whether the defendant directors behaved inequitably by intentionally concealing from Morelli and other directors their intention to amend the stockholders agreement. That framework seems to assume that if all directors are required to be given fair notice of the agenda for a special meeting, a director with board appointment rights might in some cases use them, and thereafter elect new directors. That might, of course, happen. But if those directors breach their fiduciary duties, our law has potent remedies that the other stockholders can seek.7”
  • “When a board faction calls a special meeting, and is dishonest about its intention to use that meeting to alter a stockholder‘s board appointment rights, the Court of Chancery‘s analysis should involve a considered evaluation of whether intentional duplicity toward fellow board members is consistent with the fiduciary duties those directors owe to the company and its stockholders, including stockholders who are entitled to rely upon stockholder agreements executed in conformity with the DGCL.10  Biasing that analysis by describing it as involving the creation of a class of super directors is unhelpful. Although it may be that directors who own large amounts of stock and have considerable voting power are entitled to no more fair notice than independent directors, surely they are entitled to equal treatment and we doubt that one would label independent directors super directors if they complained after being blindsided by a board majority at a special meeting. Our law should develop in future cases when the outcome turns on it.” [i.e., not this case.]

 

 The Delaware Supreme Court decided today, over a dissenting opinion, that a non-Delaware corporation cannot be sued in Delaware, even if it is registered to do business in Delaware, if the basis for the suit against it in Delaware is unrelated to the fact that it is registered to do business in Delaware as a foreign corporation. Genuine Parts Co. v. Cepec, Del. Supr., No. 528, 2015 (April 18, 2016). This ruling should be compared generally with an unrelated recent opinion of the Delaware Supreme Court, in Hazout v. Tsang, highlighted on these pages, that interpreted a statute to make it easier to impose jurisdiction in Delaware over directors and officers of Delaware corporations.

This recent Supreme Court opinion in Genuine Parts needs to be read by anyone who wants to understand the latest iteration of Delaware law on the two types of personal jurisdiction and, in particular, the difference between general jurisdiction and specific jurisdiction as it applies to foreign corporations who are registered to do business in Delaware. The court distances itself from a decision of almost thirty years ago in Sternberg v. O’Neil, 550 A.2d 1105 (Del. 1988), in connection with applying the registration statutes at Sections 371 and 376 of Title 8, as well as the long-arm statute at Section 3104 of Title 10 of the Delaware Code.

In sum, Delaware’s high court applies the U.S. Supreme Court decision in Daimler AG v. Bauman, 143 S. Ct. 746 (2014), to interpret the Delaware statutes requiring foreign corporations to register to do business in Delaware to mean, for purposes of an analysis of personal jurisdiction consistent with the Due Process Clause of the U.S. Constitution, as follows: “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.” This ruling has wide application for those engaged in the practice of commercial litigation in Delaware and other types of civil litigation involving corporations.

 

Generally, a successful claim for advancement of legal fees for a former director or officer entitles the prevailing party to “fees on fees” incurred for obtaining the favorable ruling. A recent ruling from the newest member of the Delaware Court of Chancery explains the limitations or the contours of that general rule. In Wong v. USES Holding Corp., C.A. No. 11475-VCS (Del. Ch. April 5, 2016)(“Wong II“), the court denied a motion for reargument of a prior ruling on that issue by the most recently retired member of the court. Wong v. USES Holding Corp., C.A. No. 11475-VCN (Del. Ch. Feb. 26, 2016)(“Wong I“).

This useful decision concerning this perennial issue in corporate litigation can be most easily highlighted by noting that the issue addressed was: when the “fees on fees” started to accrue. After a thoughtful review of both the controlling bylaws and DGCL Section 145 (e), the court reasoned that the obligation of the corporation to advance fees, and thus the triggering of the fees on fees, did not commence until the required undertaking by the former officer was submitted.

This pithy decision deserves a place in my annually updated chapter in a book published by the ABA that provides an annual review of the key decisions from Delaware and around the country on the topic of advancement and indemnification of directors and officers. The 2016 edition with 2015 cases is expected to be available imminently from the ABA and was co-written by yours truly along with my colleagues Gary Lipkin and Aimee Czachorowski. Information about the last publication is available at this link.

Supplement: Frank Reynolds of Thomson Reuters has published an article about this case that provides more factual background and practical insights.

The recent opinion from the Delaware Court of Chancery in Dieckman v. Regency GP LP, C.A. No. 11130-CB (Del. Ch., March 29, 2016), provides a useful reminder that the Delaware statutes for alternative entities, such as the LP in this case, allow for a waiver of all fiduciary duties. The only exception to that rule is that the implied covenant of good faith and fair dealing cannot be waived, but that is a porous net that does not save many claims and is a notoriously difficult theory to prevail on. See 6 Del. C. Section 17-1101(d)(allowing elimination of fiduciary duties in LP).Traffic Lights, Road Sign, Red, Yellow

This helpful opinion is also noteworthy for, in essence–in my words, reminding readers that claimants should look to federal law and not Delaware law in those cases where all fiduciary duties are waived under state law. See footnote 62. The court suggests a potential basis in federal law to seek remedies for disclosure violations and related claims, where Delaware law offers little or no solace in these situations. This noteworthy judicial observation should be compared to the many scholarly articles that decry the “creeping federalization” of corporate law, which for many years has threatened to displace Delaware as the nation’s leading source for corporate governance jurisprudence and a leading forum for corporate litigation. See, e.g., the scholarly articles of Professor Mark Roe and Professor Stephen Bainbridge, among many others. Footnote 62 refers to federal statutes that may be a source of potential claims when all fiduciary duties are waived under state law.

The decision cites to many prior Delaware opinions in which a provision in an LP agreement provides a procedure for handling conflicted, affiliated transactions by which a committee will “sanitize” such transactions. The court also notes that by contrast, fiduciary duties cannot be waived in the corporate context and the “cleansing procedure” of shareholder ratification in the corporate context is also dependent upon both sufficient disclosures and a majority of disinterested stockholders approving such contested transactions. See, e.g., footnote 30 for cases cited on this point.

Another practical iteration of Delaware law in this opinion for those who make their living in the vineyards of corporate and commercial litigation, relates to the elements of “tortious interference with contract”. One of the elements of such a claim is “an intentional act that is a significant factor in causing the breach of the contract.” An important exception to that requirement, however, exists when: “defendant’s wrongful conduct … induces the termination of the contract, irrespective of whether termination is lawful.” See footnote 74 for supporting case law.

The recent Delaware Court of Chancery opinion in Hyatt v. Al Jazeera American Holdings II, LLC, C.A. No. 11465-VCG (Del. Ch. March 31, 2016), is useful for those who need to be aware of the latest iteration of Delaware law on advancement of fees incurred by former officers and directors, which is one of the more common forms of corporate litigation. This is the latest in an ongoing series of rulings in Delaware involving a transaction in which the media company known as Al Jazeera, based in the Middle East, purchased a cable TV company in the U.S. which was owned at least in part by the former politician, Al Gore, as well as Joel Hyatt. Some of those decisions have been highlighted on these pages.

Introduction: The court begins the opinion with the apt description of many advancement cases being indicative of “Hirer’s Remorse”, to the extent that advancement is given to employees, officers and directors as an inducement for them to accept their positions for the benefit of a corporation, but afterwards when those corporations need to make payments pursuant to those advancement obligations, they often resist and try to find reasons not to pay.

Background. This case involves a twist on that typical pattern. Al Jazeera assumed the obligations of advancement from the company that it purchased. The underlying litigation began when Hyatt and Gore sued Al Jazeera to collect money that was placed in escrow after the transaction. Al Jazeera then counterclaimed against Hyatt and Gore contending that they breached provisions of the merger agreement based on certain alleged misrepresentations and related claims. It was undisputed that the initial claims in the suit filed by Hyatt and Gore were not covered by advancement. This case involved whether the counterclaims against Hyatt and Gore entitled them to advancement of their fees and expenses.

Key Facts: In large measure the case turned on whether the counterclaims against Hyatt and Gore were made against them in their capacities as former officers and directors. The court analyzes each of the counterclaims separately and found that most of them did assert allegations based on the actions of Gore and Hyatt as former officers and directors of the company. The analysis was based on the terms of the merger agreement which incorporated the advancement provisions in the LLC operating agreement.

Notably, the court found that fee shifting provision in the relevant agreement did not supersede the advancement obligation and that the shifting of fees provision was silent on the issue of advancement.

Useful Nuggets include the following:

“Although indemnification and advancement rights are closely related, each are ‘distinct types of legal rights,’ and the ‘right to advancement is not ordinarily dependent upon a determination that the party in question will ultimately be entitled to be indemnified.’” See footnotes 31 and 32. The foregoing statement perhaps encapsulates the counterintuitive nature of the concept of advancement and is the aspect that most commonly frustrates many corporations who find it difficult to advance fees and expenses when they are at least personally convinced that ultimately the former officer and director will not be entitled to indemnification.

Another nugget of legal insight in this case refers to the application of cases interpreting Section 145 of the Delaware General Corporation Law to advancement provisions in LLC operating agreements. Footnote 38 in the opinion and the accompanying text explain how the court often applies the reasoning in cases interpreting Section 145 to the interpretation of language in an LLC operating agreement or other agreements that often incorporate the same statutory advancement language verbatim from Section 145. In this case for example, the operating agreement conferred advancement on former officers and directors that incurred expenses “by reason of the fact” that the person was a former officer and a director. That language tracks the language in Section 145 of the DGCL. The court cites to other cases that have relied on Section 145 jurisprudence to interpret provisions in agreements that use the same or similar language as the statute.

The court referred to Section 18-108 of the Delaware LLC Act as giving broad authority to LLCs to provide indemnification by contract. Specifically, the court in this case found that the parties intended to import the “strictures” of Section 145 by using the same language in their agreement. The court also allowed for “fees on fees” which is a well-established principle to cover the costs of litigation to the extent that a party prevails in establishing the right to advancement, as in this case.