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Court Of Chancery Limits Conditional Advancement Contracts

Blankenship v. Alpha Appalachia Holdings Inc., C.A. 10610-CB (May 28, 2015)

Corporations continue to regret conferring broad advancement rights on their former directors. This is yet another example of an effort to get out of that obligation.

As in the past, the Court of Chancery again rejects this effort to welch. Notwithstanding a charter and bylaw provision that gave a former director the broadest rights to advancement, the company had him sign an undertaking that it argued gave it the right to cut off advancement if it turned out, in the company’s opinion, that the director’s representation that he had acted lawfully was untrue. The Court rejected the company’s interpretation of the undertaking based on ordinary contract interpretation rules that showed the company’s interpretation was unreasonable. The obvious lessoon is to do a better job of drafting.

Perhaps more significant, the Court also ruled that the company had no right to insist on conditions to advancement when those conditions were not in the charter or bylaws that established to right to the advancements. Hence, limits on advancement need to be in the very documents that established the right to begin with.

Finally, the Court declined to appoint a master to rule on the reasonableness of the fees requested. This may be a shift from past practice where on occasion such masters were appointed.

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