Delaware Business Litigation Report

Chancery Addresses Indemnification Rights Following CEO’s Partial Success On Underlying Claims, Including Success Based on Technicalities

Evans v. Avande, Inc. , C. A. No. 2018-0454-LWW (Del. Ch. Sept. 23, 2021)
The departure of a company’s CEO was contentious. After his termination, the company filed an action in the Court of Chancery, alleging that the CEO had breached his duty of loyalty, sought a declaratory judgment that his removal was valid and effective, and further asserted claims for tortious interference, defamation, and conversion against the CEO. After trial, the Court concluded that the CEO had breached his duty of loyalty but that the company had failed to brief, and therefore had waived, its claims for declaratory judgment, tortious interference, defamation, and conversion. On the basis of mandatory indemnification rights in the company’s charter and bylaws, the CEO filed a complaint in the Court of Chancery seeking indemnification for his fees incurred defending against the company’s suit.

The Court granted partial summary judgment in the CEO’s favor on the grounds that he was entitled to mandatory indemnification for losses that he incurred in connection with the declaratory judgment and conversion claims. The Court reasoned that the CEO had prevailed on those two claims—even though he only prevailed because the company failed to address them in post-trial briefing—and that those two claims were intertwined with his position as CEO. Although he also had prevailed on the claims for tortious interference and defamation due to the same technicality, there remained issues of material fact as to whether those claims were based on conduct that occurred while he was CEO, or purely on post-termination conduct. The Court also rejected the CEO’s argument that he should be indemnified for the duty of loyalty claim in proportion to the damages the company proved versus the damages the company sought. The Court noted a lack of authority where partial success was analyzed based on the percentage of damages a prevailing party recovered against an indemnitee, rather than on a claim-by-claim basis. Moreover, the CEO had not prevailed on the issue of whether he had breached his duty of loyalty. Finally, the Court awarded the former CEO fees-on-fees and expenses proportionate to his success in obtaining indemnification for the declaratory judgment and conversion claims.

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