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Chancery Denies Advancement for Director Suspected of Leaking Confidential Financial Information

Hoffman v. First Wave BioPharma, Inc., C.A. No. 2023-0097-MTZ (Del. Ch. September 27, 2023)
A company's board of directors suspected one of its members had leaked the company's financial information to a third party and that the third party used the information to obtain a more favorable settlement with the company. In response, the board formed a board committee for discussion of confidential matters consisting of all directors other than the one suspected of having leaked information. The excluded director engaged an attorney to contest the formation of the board committee and filed an action for the advancement of his legal fees. He relied on an indemnification agreement that granted him a mandatory advancement right for fees incurred by reason of his corporate status in connection with a covered proceeding; he argued that the directors must have investigated his conduct if they had reached a conclusion that he had leaked information and that an investigation was a covered proceeding.

In this post-trial decision, the Court of Chancery determined plaintiff was not entitled to advancement. The Court found no documentary or testamentary evidence that a covered proceeding had occurred. The Court next found plaintiff had not adequately pled an alternative claim for advancement. At first cursorily in his pre-trial brief, and then more fully at trial, the plaintiff developed an alternative theory that the company had “threatened” to investigate him and that under the indemnification agreement, a threatened proceeding was a covered proceeding. The Court determined this late-arising theory did not provide the defendant with fair notice of an intent to litigate a claim based on a threatened proceeding, and that in any event plaintiff had failed to move to amend his complaint at or after trial to include such a claim. Accordingly, the Court ruled in favor of the defendant company.

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