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Delaware Court of Chancery Holds Company in Contempt for Failure to Pay Advancement

Articles & Publications

July 2023
by K. Tyler O'Connell
Business Law Today

Directors, officers and other members of management often have the right under a company’s organizational documents to have defense costs advanced during the pendency of a covered case, investigation or other proceeding. If the company does not comply, the person with advancement rights can initiate a summary advancement proceeding in the Delaware Court of Chancery to obtain a Court order requiring payment by a date certain. In Gandhi-Kapoor v. Hone Capital LLC, 2023 WL 4628782 (Del. Ch. Jun. 19, 2023), the Court of Chancery held that a failure to pay as required is punishable as contempt.

Here, the advancement petitioner was the former Chief Financial Officer and a Partner of a venture capital fund. Her employment was terminated for disputed reasons, and the fund sued her. Although the Court of Chancery ordered mandatory advancement, the Company did not pay, forcing her to bring a motion for contempt. The Court reasoned that, although money judgments generally are not enforceable by contempt, advancement orders are different. They are interim fee awards intended to be paid on an ongoing basis during the life of the advancement proceeding. Moreover, the Court of Chancery has broad equitable discretion to shape relief when there otherwise was an inadequate remedy at law. A company’s failure to provide mandatory advancement may threaten irreparable harm – potential prejudice in the underlying proceeding that cannot readily be undone. In granting sanctions, the Court exercised its discretion and imposed the least possible sanction that it believed may ensure compliance. The Court denied the petitioner’s request for a limited purpose receiver, reasoning that, while that relief could be available, it was not appropriate in the presently known circumstances. The Court imposed a $1,000 per day fine, an amount that the Court held appropriately exceeded the returns per day the venture capital firm might expect to realize on the withheld amounts. The Court reasoned that additional contempt sanctions may be imposed in the future if necessary to enforce compliance.

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