Sun-Times Media Group, Inc. v. Black, C.A. No. 3518-VCS (July 30, 2008) (V.C. Strine)
In this advancement action, the Court of Chancery held that Sun Times Media Group was required to advance defendants’ legal fees incurred in criminal proceedings against them even after defendants were convicted and sentenced by the trial court. The Court held that Sun Times’s advancement obligation continued until a final, non-appealable conclusion of the criminal proceeding.
Defendants Black, Boultbee, Atkinson and Kipnis were convicted of mail fraud relating to certain
non-compete payments made as part of an alleged scheme of self-enrichment while the four defendants were serving as officers of Sun-Times, f/k/a Hollinger International, Inc. Black was also convicted of obstruction of justice. After defendants were sentenced by the trial court, and while their appeal to the 7th Circuit Court of Appeals was pending, Sun-Times filed the action in Delaware, seeking a declaration that it was not obligated to advance defendants’ legal fees incurred after their sentencing. Sun-Times also sought a determination that the defendants would not ultimately be entitled to indemnification on the counts for which they were convicted, and were therefore obligated to repay such amounts to Sun-Times. Sun-Times filed a motion for partial summary judgment on its continuing advancement obligations to defendants, and the defendants moved to dismiss the entire action.
Sun-Times’ bylaws track 8 Del. C. 145 and require the company to advance legal fees incurred
by directors and officers in defending a threatened or pending civil, criminal, administrative or
investigative action, suit or proceeding “in advance of the final disposition of such action,” upon
receipt of an undertaking to repay such amount “if it shall ultimately be determined” that the
corporate official is not entitled to indemnification from Sun-Times. The Bylaws also provide that the company is not obligated to indemnify any director or officer “in connection with any proceeding (or part thereof) initiated by such person.”
The Court held that “final disposition” in this context means “the final, non-appealable conclusion of a proceeding,” reasoning that “advancement through final disposition of a proceeding is best read as temporally connected to the ‘ultimate determination’ of entitlement to indemnification, which only becomes ripe once the underlying proceeding is truly final.” The Court rejected Sun-Times’ argument that it was not required to advance fees related to the appeal because it was a proceeding initiated by the defendants, holding that the term “defending” should be interpreted broadly in the context of an advancement bylaw to include appeals of a criminal conviction. The Court also considered Sun-Times’s course of performance, in which it had previously advanced fees and expenses incurred during an appeal, to be compelling evidence of how the provision should be interpreted. Finally, the policy behind Section 145 favored continuing a Company’s advancement obligation until a final, non-appealable judgment in order to avoid a patchwork determination of corporate officials’ rights. Accordingly, the Court held that Sun-Times was obligated to continue advancing defendants’ legal expenses, and dismissed without prejudice the remaining claims because defendants’ entitlement to indemnification could not be decided until a final, non-appealable judgment.