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Advancement Available for Post-Separation Misuse of Confidential Information Obtained “By Reason of the Fact” of Corporate Service

Posted In Advancement

Ephrat v. medCPU, Inc., C.A. No. 2018-0852-MTZ (Del. Ch. Jun. 26, 2019).

Former directors and officers may be entitled to advancement for post-separation conduct if that conduct is "by reason of the fact" of the directors' and officers' corporate service.  In response to claims brought by former directors and officers for payments due under the parties' separation agreement, the company counterclaimed that the petitioners had breached non-compete obligations under the agreement and had improperly used the company's confidential information.  The petitioners then sought advancement under the company's charter (which incorporated DGCL Section 145’s “by reason of the fact” standard), but the company contended no advancement was necessary because the complained-of conduct followed petitioners' separation from the company. The Court of Chancery reviewed its past decisions on this issue, beginning with Brown v. LiveOps, Inc., 903 A.2d 324 (Del. Ch. 2006). The Court ultimately concluded that the case upon which the company relied – Lieberman v. Electrolytic Ozone, Inc., 2015 WL 5135460 (Del. Ch. Aug. 31, 2015) – was "difficult to harmonize" with the others. Those other cases stand for the principle that allegations of misusing confidential information obtained “by reason of the fact” of former directors’ and officers’ service to the company may trigger advancement rights – even if the alleged misuse occurs after separation and in violation of the directors' and officers' personal agreements with the company.  Consequently, the Court held that the petitioners were entitled to advancement for any counterclaims "where the underlying acts depended on or utilized confidential information [the petitioners] obtained by reason of their service at [the company.]"  By contrast, they were not entitled to advancement to defend against post-separation violations of their personal contractual obligations that had no alleged "nexus or causal connection to [the petitioners'] service” – such as by engaging in an allegedly competing business, soliciting employees and unlawfully accessing the company’s computer systems – all of which allegedly occurred without any use of confidential information obtained while in service at the company.