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Summaries and analysis of recent Delaware court decisions concerning business-related litigation.
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Chancery Modifies Advancement Award, Finds Amended Claim Challenging Only Post-Separation Conduct No Longer Triggered Advancement Obligations
Under Delaware law, an order requiring a company to advance attorneys’ fees and expenses may be modified if the claims that triggered the advancement obligation are amended to no longer do so. In this case, a company successfully amended its claims against a former director and officer to eliminate certain advancement obligations.
Here, the Court of Chancery modified an order requiring Heartland Payment Systems LLC (“Heartland”) to advance defense costs incurred by its former CEO and board chairman in litigation Heartland brought against him. Heartland alleged that he breached his fiduciary duties via insider trading. Heartland also alleged that, after leaving the company, he breached restrictive covenants in his employment agreement. The latter, contract-based claims originally included allegations that Carr misused confidential information obtained when he was a Heartland officer and director. In response, Carr sought advancement for both the fiduciary duty claim and the contract claim, which the Court of Chancery granted.
Heartland then amended its complaint such that its contract claim challenged only Carr’s post-employment competition and solicitation activities. It no longer relied on allegations that he misused confidential information obtained as a Heartland director or officer. Heartland then moved to modify the Court of Chancery’s earlier advancement award.
The Court noted that the contractual advancement right at-issue required the underlying litigation to “pertain to” Carr’s status as an officer or director. Under Delaware law, a claim that relies on the misuse of confidential information learned while the party seeking advancement was an officer or director may “pertain to” the party’s former position. By contrast, a claim that merely alleges post-employment breach of a non-compete agreement does not. Because the amended complaint had erased all mention of confidentiality, and because the defendants represented to the Court that they would not base their claim on any misuse of Heartland’s confidential information, the Court concluded that the amended complaint no longer triggered advancement rights. The Court accordingly granted the defendants’ motion to modify and no longer required advancement for those claims.