Corporate

Delaware Court of Chancery Allows Advancement for Motion to Intervene by Former CEO

 The Delaware Court of Chancery, in the decision styled In re Genelux CorporationC.A. No. 10612-VCP (Del. Ch. Oct. 22, 2015), determined that a former CEO and Chairman of the Board was entitled to advancement in connection with his Motion to Intervene in a proceeding in which the corporation was a party and in which actions he had taken as the CEO were being challenged, and the election of directors was also being contested [subscribers can access an enhanced version of this opinion: lexis.com | Lexis Advance]. Typical advancement proceedings involve a former officer or director who was named as a defendant. Delaware case law also recognizes advancement eligibility for compulsory counterclaims. This is an unusual case where advancement is sought in connection with fees incurred by a former CEO who intervened to become a party in a pending matter. A companion decision in this case involving a resolution of the disputed director election was decided the same day as the instant ruling.

The corporation refused to make advancement payments based on the argument that the former CEO intervened based on purely personal reasons to pursue personal rights. The court, however, viewed the intervention as the equivalent of a mandatory counterclaim, which prior Delaware cases have found eligible for advancement. Moreover, the intervention related to the validity of an election for directors in addition to issues related to the fiduciary duties of the former CEO who sought to intervene. The court reasoned that if he had not intervened, he might otherwise be barred on collateral estoppel grounds from arguing that he had discharged his fiduciary duties properly. See footnotes 15 and 17.

In addition, the court explained that it would be inequitable to deny the former CEO his right to advancement based on the facts of this case. The terms of the agreement which provided for advancement purported to require that prior to a former officer being eligible for advancement in a matter for which he initiated a court filing, the corporation’s board of directors first had to authorize the commencement of such a filing. By contrast, the Court of Chancery found the terms of that condition for advancement in this matter to be inequitable because, for example, it would allow the company to allege misconduct of a former officer or director in a suit that the former officer or director was not named in, but in that instance the company could use that condition to prevent advancement for the necessary intervention by that former officer or director, as in this matter, to defend allegations made about him for actions taken while he was an officer or director.

This important equitable limitation on the conditions sought to be imposed on advancement obligations of a company will have widespread applicability and importance.

This decision also rejected the argument that advancement should not be available where D&O insurance is already covering the fees incurred. The rejection of that argument was based on the reasoning that advancement must be allowed to extent that the applicable D&O coverage imposed limits on the hourly rate of the former officer’s counsel, and also because the coverage was also subject to a cap, for which advancement should be available when the cap is exceeded.

 Read more Delaware business litigation case summaries and commentary on Delaware Corporate and Commercial Litigation Blog, a blog hosted by Francis G.X. Pileggi, of Eckert Seamans.

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