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Underbrink v. Warrior Energy Servs. Corp., C.A. No. 2982-VCP (Del. Ch. May 30, 2008) (Parsons, V.C.)

May 30, 2008

In Underbrink, Charles Underbrink and James Harrison (together, the “Plaintiffs”) were former directors of Warrior Energy Services Corp (“Warrior”) who stepped down in connection with a secondary public offering by Warrior (the “SPO”). Shortly before the SPO, the Warrior Board of Directors (the “Board”) adopted amended and restated bylaws (the “Bylaws”), which, among other things, provided for mandatory retroactive advancement rights. Seven months after the SPO, Plaintiffs were sued in connection with pending proceedings in Texas (the “Texas Proceedings”) in their capacity as directors of Warrior and in connection with their positions in two investment partnerships (the “St. James Partnerships”), which were large shareholders in Warrior prior to the SPO. The Texas Proceedings were initially filed by certain limited partners of the St. James Partnerships. The Plaintiffs sought advancement of their legal fees and expenses in connection with the Texas Proceedings from Warrior, but Warrior denied their requests. Plaintiffs then filed the current action seeking an advancement of their legal expenses and fees under Section 145 of the General Corporation Law of the State of Delaware (the “GCL”) and the Bylaws.

Warrior contended that Plaintiffs could not seek advancement under the Bylaws for several reasons. First, Warrior contended that the 2006 Bylaws were not properly adopted because the Board did so by written consent, and not at a meeting. The Bylaws granted the Board the power to adopt, amend, or repeal the Bylaws “at any regular or special meeting.” Warrior argued this precluded the Board from acting by written consent to amend the Bylaws and relied upon Moon v. Moon Motor Car Co. which invalidated bylaws adopted at a special meeting where the board only had the power to adopt the same at a regular meeting. The Court rejected Warrior’s argument, noting that Moon was decided before the adoption of Section 141(f) of the GCL which allows a board to act by unanimous written consent. In the alternative, Warrior argued that the provision allowing the Board to amend the Bylaws at a regular or special meeting implicitly limited its right to act by written consent. The Court also rejected this argument, noting that Section 141(f) permits a board to approve by written consent any action required or permitted to be taken at a board meeting, unless otherwise restricted by the certificate or bylaws, that nothing in the Bylaws could be read as “otherwise restricting” the power to amend by written consent and that such a reading undermines the policy behind Section 141(f). Second, Warrior argued that the Plaintiffs could not seek advancement because it did not receive consideration in exchange for agreeing to provide retroactive mandatory advancement.  In rejecting this argument, the Court pointed out that simultaneously with the approval of the Bylaws, the Plaintiffs approved many of the necessary components for the SPO and shortly thereafter, the Plaintiffs signed Warrior’s S-1 registration statement with the SEC. Third, Warrior argued that the Bylaws were void because their adoption was a breach of the Plaintiffs’ fiduciary duties. Warrior argued that the passage of the Bylaws was subject to entire fairness review because Plaintiffs benefitted directly from the advancement provision. The Court relied on Orloff v. Shulman wherein the court held that the adoption of a mandatory advancement provision, even in the face of an imminent threat of litigation, is subject to only to review under the business judgment rule. Citing Havens v. Attar, the Orloff court limited its decision to situations in which “plaintiffs challenge the adoption of a bylaw that requires the corporation to advance litigation costs some time in the future rather than challenging the directors’ decision to advance particular litigation expenses.” The Court concluded that at the time the Board adopted the Bylaws, Plaintiffs faced nothing more than an “imminent threat of litigation” for actions taken by Plaintiffs as Warrior directors. Therefore, the Court held that the business judgment rule applied to Plaintiffs’ adoption of the Bylaws. Finally, Warrior argued that the Plaintiffs were not entitled to seek advancement because their respective undertakings to repay the corporation were insufficient. Plaintiffs’ undertakings contained a limitation that they would not repay amounts advanced until “all appellate remedies related to [a determination that he is not entitled to indemnification] have expired or been exhausted.” The retroactive mandatory advancement provision required advancement up until the time of “final disposition.” Warrior argued that his term was synonymous with a “final judgment” in that a trial court decision clearly defining the parties’ rights and leaving nothing for future determination constitutes a final disposition. The Court disagreed and held that there was at least a colorable argument that a “final disposition” did not occur until all appellate remedies had been exhausted or expired. Further, because Warrior did not object to the form of the Plaintiffs’ undertakings contemporaneously with its initial denial of their requests for advancement and did not specify the reason of the denial therefor until shortly before trial, the Court rejected Warrior’s denial of advancement to Plaintiffs based upon improper undertakings.

Next, the Court considered the claims for which the Plaintiffs were entitled to receive advancement. Warrior argued that claims for advancement in connection with claims that had been dismissed from the Texas Proceedings after the advancement trial were moot because they should become claims for indemnification, as the dismissals made Plaintiffs successful on such claims. The Court disagreed, noting that such a holding would effectively reward Warrior for pressing counterclaims and other defenses which drew out the advancement action past the time that plaintiffs became successful on such claims.

The Court also held that Warrior was only required to advance the Plaintiffs’ expenses for defending claims related to their status as directors of Warrior and not those related to their positions with the St. James Partnerships. With regard to expenses, the Court required Plaintiffs to submit good faith estimates of such expenses, along with a sworn affidavits by Plaintiffs’ attorneys certifying their good faith, informed belief that the expenses relate only to the defense of allegations for which Plaintiffs are owed advancement.

With regard to Plaintiffs’ request for an award of their reasonable attorneys’ fees for prosecuting the instant advancement action, the Court held that, as the Bylaws provide for indemnification “to the fullest extent permitted by law,” Warrior must indemnify Plaintiffs for “fees on fees” in pursuing an action to vindicate their indemnification or advancement rights. The Court held that, because most of the litigation surrounding the current action focused on Warrior’s defenses and counterclaims to avoid payment of advancement rather than a substantive dispute as to which claims are properly subject to advancement, the Plaintiffs were entitled to all attorneys’ fees they actually and reasonably incurred in connection with the current action.

Finally, the Court granted the Plaintiffs’ request for pre-judgment interest on expenses subject to advancement to be compounded quarterly. The Court also granted Plaintiffs’ request for postjudgment interest on the full amount of the judgment.

The full opinion is available here