Vice Chancellor Glasscock of the Delaware Court of Chancery recently held that former directors and officers of an acquired target – one of whom served as a sellers' representative under the merger agreement – were entitled to advancement of fees and expenses in defending themselves against certain claims by the buyer for indemnification for breaches of representations regarding the target's business.(1)
Joel Hyatt and Albert Gore, former directors (one of whom was also a former officer) of Current Media LLC, asserted rights to advancement of expenses under the company's operating agreement in connection with litigation arising from the completed merger. Al Jazeera International (USA) acquired Current Media. In the merger agreement, Al Jazeera had assumed the obligations of advancement to the extent that Current Media would have been so obligated. When Hyatt and Gore sued Al Jazeera to invalidate certain indemnification claims made by Al Jazeera and to collect money that was placed in escrow after the transaction, Al Jazeera counterclaimed, arguing that Hyatt and Gore had breached the merger agreement by rejecting Al Jazeera's indemnification claims. Responding to Hyatt and Gore's argument that they were entitled to advancement of their fees and expenses, Al Jazeera argued that advancement was not applicable because its counterclaims did not relate to actions taken by Hyatt or Gore in their capacity as former directors and officers. Hyatt and Gore argued that the counterclaims required them to defend their actions as former directors and officers.
The court engaged in a detailed analysis of the applicable provisions of the merger agreement and Current Media's limited liability company (LLC) operating agreement. The court held that the indemnification provision in the merger agreement did not supersede the right to advancement arising from another section of the merger agreement, noting that:
"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.'"
The court concluded that Hyatt and Gore were entitled to advancement, to the extent that they would have been so entitled under Current Media's LLC operating agreement.
Noting that advancement rights "do not attach 'when the parties are litigating a specific and personal contractual obligation that does not involve the exercise of judgment, discretion, or decision-making authority on behalf of the corporation'", the court ultimately concluded that nearly all of Al Jazeera's counterclaims possessed a sufficient nexus to Hyatt's and Gore's corporate powers (ie, that the defence of the claims implicated defence of the actions taken by Hyatt and Gore in their capacity as former directors and officers of Current Media), such that advancement of fees and expenses was appropriate.
Although the facts of this case were unique, the decision serves as a reminder that parties to a transaction should carefully review scenarios in which officers and directors who are also selling stockholders are entitled to advancement. Buyers in particular should consider whether the provisions of any existing agreements could require them to fund both sides of the litigation.
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