About This Blog
Summaries and analysis of recent Delaware court decisions concerning business-related litigation.
Morris James Blogs
Showing 9 posts in Indemnification.
As this summary judgment decision illustrates, even where parties to a securities purchase agreement agree on a buyer’s entitlement to indemnification for future tax liabilities, absent specific language to the contrary, the buyer generally must suffer harm before such a claim will be ripe for decision. That is because, under the ripeness doctrine, Delaware courts will decline to decide issues presenting only hypothetical harm. More ›
Chancery Offers Guidance on When the Limitations Periods Begin to Run For Claims Concerning Breaches of Representations and Warranties and Related Indemnification
Delaware law provides for a default three-year statute of limitations period for breaches of contract, generally applicable to claims for breaches of representation and warranties and related claims for indemnification concerning stock purchase agreements or assets sales. More ›
Chancery Upholds Adequacy of Description of Buyer’s Indemnification Claims but Finds Indemnification Request for Pending Litigation Unripe Because Buyer Failed to Allege it Had “Incurred” Losses
Sellers in merger agreements generally agree to indemnify buyers for certain “Losses” but require the buyers to provide timely notice of claims. Whether an indemnification claim succeeds depends on the language the parties use to define the indemnification obligation. In Horton, the seller agreed that indemnification claims would survive if the buyer provided by June 24, 2018 written notice “stating in sufficient detail the nature of, and factual and legal basis for, any such claim for indemnification” and an estimate and calculation of the amount of Losses, if known, resulting therefrom. The buyer timely sent a notice of indemnification with one-paragraph descriptions of the factual and legal basis of each of its five claims, which it said “may involve breaches of representations and warranties in the Merger Agreement.” It also sought a second category of indemnification for Losses arising out of pending litigation. As to the first category, the Court found the buyer’s one-paragraph descriptions sufficient even though the buyer did not specify the specific sections of the merger agreement it claimed were breached. This was because “sellers are charged with knowledge of their representations and warranties in the Merger Agreement.” As to the second category, the Court granted the seller’s motion to dismiss without prejudice, because the buyer had not adequately pleaded that it had incurred any costs, fees or adverse judgments in the litigation.
Even when an indemnitee takes a circuitous path to victory, the indemnitee is entitled to indemnification under 8 Del. C. § 145(c) for litigation expenses if the indemnitee is ultimately successful “on the merits or otherwise.” Brown, an officer and director of Rite Aid, sought indemnification under § 145(c), as well as the corporate bylaws and charter, for litigation that spanned from 2002 to 2016 in Pennsylvania. Brown prevailed against Rite Aid in the Pennsylvania litigation on technical defenses. Despite this outcome, Rite Aid sought to limit the amounts to those attributable to Brown's successful technical defense and to exclude amounts attributable to several years of other unsuccessful defenses. But the Court continued its long-standing practice of "look[ing] strictly at the outcome of the underlying action" to determine whether an indemnitee is "successful on the merits or otherwise" under § 145(c). Under this "simple rubric for success," Brown avoided a "personally negative result," so he was entitled to indemnification.
This decision resolves indemnification issues that regularly arise. First, when there are two possible indemnitors and one pays up, may the indemnitee still seek indemnification from the second indemnitor? It depends on when the obligation to indemnify arose. If the indemnitor who actually paid up only assumed that duty after the underlying claim arose that led to the expense to be paid, then that indemnitor is a volunteer and its indemnitee may seek payment from the other indemnitor. Note that this decision does not foreclose suit by the actual indemnitor for equitable contribution. More ›
This is an interesting indemnification decision for its handling of subrogation rights in the indemnification context, one involving former Quiznos officers. First, it holds that, generally speaking, when a party who may be secondarily liable for indemnifiable litigation costs covers the indemnitee’s litigation costs, it may then recover those costs from the party who is primarily liable. Second, it questions whether the “volunteer” exception can apply to subrogation rights in the Section 145 indemnification context. Third, it holds that the Court will enforce fee-sharing arrangements among defendants such that the indemnitee can only recover its pro rata proportion of the fees. Fourth, it enforces such a limitation on a subrogee, such that the subrogee cannot recover more than the indemnitee could have recovered. Fifth, it holds that a subrogee has the same right to fees-on-fees that the indemnitee would have if it had been the party seeking indemnification.
HOMF II Investment Corp v. Altenberg, C.A.2017-0293-JTL (Transcript December 13, 2017)
A provision in an LLC agreement that provides for “indemnification" “as incurred” does not provide for advancement. This illustrates that the confusion between advancement and indemnification still exists. If you want advancement, you had better say “advancement.”
When an obligation to indemnify includes the fees incurred in the underlying litigation is a surprisingly frequent question. This decision works its way through a series of contractual provisions to answer that question. The lesson is that the contract needs to specifically say fees are to be included.
This officer indemnification case arises out of one of the more sordid tales to appear in a Court of Chancery opinion and a later Delaware Supreme Court affirmance. This opinion, however, focuses on the less titillating but always intriguing question of whether the officer was sued by reason of the fact that he was an officer, as required to trigger indemnification rights.