A recent opinion from the Delaware Chancery Court addresses directors' and officers' indemnification and advancement rights. The facts were as follows: a former CEO had incurred substantial legal expenses defending claims asserted against him in federal court by his former employer's parent company. While that lawsuit was underway, the former CEO demanded that his former employer (the subsidiary) advance his legal expenses as he incurred them. The subsidiary's bylaws provided its officers with mandatory indemnification and advancement. When the subsidiary refused, the former CEO filed suit in Delaware Chancery Court. The Delaware Chancery Court determined that the subsidiary was required to advance the former CEO's expenses in the federal action, but the parties could not agree on the proper amount that should be advanced, which required a ruling from the court.
The court noted that the party seeking to recover its legal expenses has the burden of justifying the amounts requested, and that the reasonableness of attorneys' fees are reviewed under a multi-factor test that considers, among other things, the fee customarily charged for such disputes, the results obtained, and the time and labor required. The subsidiary argued that the nearly $300,000 in legal expenses that the former CEO had incurred up until that point in the federal action were not reasonable because the parent company had incurred only $85,000. However, the court was not persuaded and invoked the "pizza principle," explaining that "it is more time-consuming to clean up the pizza thrown at the wall than it is to throw it." This was a reference, the court explained, to the fact that the former CEO's lawyers had been forced to spend considerable time and effort responding to the parent company's wide-ranging claims and allegations in the federal action.
The subsidiary also complained that it should not have to advance $70,000 to reimburse the former CEO for a retainer he had paid his attorneys because advancement is limited to fees actually incurred by an indemnified party. However, the court found that the officer had actually incurred the retainer charge and had paid that amount to his attorneys and, therefore, was entitled to be advanced that amount.
Lastly, the court ruled that the subsidiary also was required to reimburse the former CEO for an additional $275,000 in legal expenses that he had incurred prosecuting the Delaware lawsuit. The judge acknowledged that this amount "falls at the high end of what I would expect for a typical advancement proceeding," but he noted that the subsidiary was largely responsible for driving up the former CEO's legal fees by unnecessarily prolonging the advancement action and reversing its litigation position on several occasions.
Danenberg v. Fitracks, Inc., No. 6454-VCL (Del. Ch. Mar. 5, 2012)