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Court of Chancery Orders Advancement of Fees for Former Directors and Officers who Sold their Stock in a Private Transaction

Posted In Advancement

Nielsen v. EBTH, Inc., C.A. No. 2019-0164-MTZ (Del. Ch. Sept. 30, 2019).

Delaware law permits advancement of fees and expenses for officers or directors who have such rights under certificates of incorporation, bylaws, or indemnification agreements.  Depending on the factual allegations of the underlying action, advancement rights can apply even for former officers and directors of a company who sold their stock in a private transaction to which the company was not a party.

Plaintiffs were former directors and officers of EBTH, Inc. (“EBTH”).  EBTH’s charter provided mandatory advancement rights to directors and officers, as well as fees-on-fees for successful efforts to enforce those rights.  Plaintiffs received similar rights via individual indemnification agreements.

Plaintiffs sold their EBTH stock to Light EBTH (“Light”), a limited liability company formed by other investors who wished to coordinate purchases of EBTH stock.  Though not a party to the stock sale, EBTH had entered into a nondisclosure agreement (“NDA”) with one of Light’s members.  Under the NDA, EBTH designated Plaintiffs as Light’s sole source of EBTH information.  Before the transaction closed, Plaintiffs made a series of representations to Light and other investors regarding EBTH’s financial vitality.  After the transaction closed, Light brought suit against Plaintiffs in federal district court in Ohio (the “Ohio Action”), alleging Plaintiffs had materially misrepresented EBTH’s deteriorating financial condition in the Stock Purchase Agreement (“SPA”).  Plaintiffs sought indemnification and advancement from EBTH; EBTH denied their requests.  Plaintiffs filed suit in Delaware to seek advancement.

The Court of Chancery granted Plaintiffs’ motion for summary judgment, finding that Plaintiffs were parties to the Ohio Action by reason of the fact that they served as EBTH officers or directors.  The Court noted the broad interpretation of advancement rights to include all actions brought against an officer or director for wrongdoing that she committed in her official capacity, and for all misconduct that allegedly occurred in the course of performing her day-to-day managerial duties.  The Ohio Action explicitly and repeatedly challenged Plaintiffs’ conduct as EBTH officers and directors, including via their control of EBTH and their insider roles in providing allegedly false information to Light under the NDA and in their official EBTH capacities.  The Court did not find it dispositive that the SPA related to Plaintiffs’ personal stockholdings; the key issue was that there was a nexus and causal connection to Plaintiffs’ official duties as directors and officers.  The Court also rejected EBTH’s argument that Plaintiffs could have breached the SPA even if they were not EBTH officers or directors, and that advancement would only be appropriate for cases in which only an officer or director could engage in wrongdoing.  So too did the Court reject EBTH’s argument that Plaintiffs were not entitled to advancement to the extent the Ohio Action sought relief based on contract rather than fiduciary duties; the Court explained that the key issue is that as to all claims Plaintiffs would be defending their actions as directors and officers of EBTH.  The Court ordered advancement for Plaintiffs, as well as their fees for securing advancement, given the straightforward fees-on-fees provision in the EBTH charter.