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Chancery Court Upholds Indicted Ex-Director's Advancement Rights

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July 8, 2015
By: P. Clarkson Collins, Jr.
Delaware Business Court Isider

Advancement provides corporate officials with immediate interim relief from the personal out-of-pocket financial burden of paying the significant ongoing expenses inevitably involved with defending investigations and legal proceedings. Delaware corporate policy favors indemnification and advancement as an important means of attracting qualified individuals to serve in corporate capacities. The recent decision of Chancellor Andre G. Bouchard in Blankenship v. Alpha Appalachia Holdings f/k/a Massey Energy, C.A. No. 10610-CB (Del. Ch. May 28, 2015), reaffirms these important policies and provides a clear exposition from Delaware's new chancellor of the difficulty of successfully challenging typical mandatory advancement provisions. In Blankenship, the court upheld against multiple attacks a former corporate official's ongoing right to advancement following his indictment on criminal charges. This indictment arose out of an explosion in a coal mine that killed 29 miners during a time when the plaintiff was CEO of the mining company and charged the plaintiff with willful violations of mine safety standards and false statements to the government.

Much of the Blankenship decision turns on the court's interpretation of particular language in an undertaking of repayment signed by the plaintiff to satisfy the statutory prerequisite for advancement. Although the company's charter provided for mandatory advancement, the company argued that certain language in the plaintiff's undertaking of repayment (repayment in the event it was ultimately determined at the conclusion of the criminal proceedings that he was not entitled to be indemnified) made the company's ongoing advancement obligation contingent. Specifically, the company argued that a contingency provision in the undertaking permitted the company to stop advancing the plaintiff's fees if the company determined that certain representations made by the plaintiff about the lawfulness of his actions were not true.

Recognizing that the plaintiff's rights under the charter were contract rights and applying contract interpretation principles, the court rejected the contingency argument as an objectively unreasonable interpretation. Even if it were ambiguous, the court noted that the limited extrinsic evidence and "the public policy of Delaware, which supports resolving ambiguity in favor of indemnification and advancement," supported the plaintiff's interpretation.

The court next addressed a second source of advancement relied upon by the plaintiff, namely, an indemnification provision in the merger agreement by which Alpha Appalachia Holdings Inc. acquired Massey Energy Co., the plaintiff's former employer. After interpreting the merger agreement to also be a source of an advancement right, the court turned to the Alpha argument that it could impose additional terms and conditions on advancement beyond the plaintiff's simple undertaking of repayment in the event he was ultimately determined not to be entitled to indemnification. Alpha argued that Section 145(e) of the Delaware General Corporation Law empowered it to impose terms and conditions on advancement to former officers and directors. The court rejected Alpha's argument and ruled that the Massey charter and the merger agreement only obligated the plaintiff to provide a simple undertaking to repay. Specifically, because no provision in the charter or merger agreement expressly authorized Alpha to demand terms and conditions on advancement other than an undertaking to repay, Alpha could not condition advancement on anything more than the simple undertaking the plaintiff had provided.

In summary, the important policies favoring advancement find expression in at least three aspects of the court's analysis:

  • The court will employ favorable contract construction principles resolving conflicting interpretations in a way that would uphold advancement rights.
  • A given right of advancement may not be limited after the fact by imposing new terms and conditions in the repayment undertaking that must be delivered to obtain advancement.
  • Recognizing the importance of providing prompt and regular defense funding through advancement, the court looks skeptically upon devices that would delay defense funding and has a strong preference for reserving these issues until later at the indemnification stage after the underlying claim has been resolved.

Typically, corporations provide indemnification and advancement rights through the charter, bylaws and/or indemnity agreements on a clear day, without overhanging investigations or litigation. Not surprisingly, corporations often grant broad indemnification rights, frequently to the maximum extent permitted by law, in order to retain or attract the most capable people to corporate service. Blankenship teaches that efforts to afford the corporation flexibility to limit or deny advancement best occur when establishing the right. Erection of after-the-fact obstacles and arguments to limit advancement will be difficult to sustain.

Delaware Business Court Insider  |  July 8, 2015

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