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Schoon v. Troy, C.A. No. 2362-VCL (Del. Ch. March 28, 2008) (Lamb, V.C.)

March 28, 2008

In this Court of Chancery Decision, Vice Chancellor Lamb decided the advancement rights of a former and a current director of a Delaware corporation in connection with defending threatened and pending fiduciary duty claims asserted by the corporation. The corporation initially attempted to interject the fiduciary duty claims in a 220 action brought by the current director; but, after the Court denied that attempt, the corporation later brought the claims in a separate action. Before the fiduciary duty claims were brought by the corporation, the board of directors amended the bylaws to remove the word “former” from its definition of the directors entitled to advancement.

First, the Court determined that the former director was not entitled to advancement. The former director argued that his rights in the pre-amendment bylaws, which granted former directors the right to advancement, vested before the adoption of the amendment. The Court rejected this argument and held that, because the former director was not named as a defendant before the corporation amended its bylaws (nor was there any evidence that the corporation was even contemplating claims against him), his rights under the re-amendment bylaws had not been triggered.

Second, the Court held that the current director was entitled to advancement. The current director sought advancement of fees in connection with defending the corporation’s motion to amend the Section 220 Action and the advancement of fees incurred after the corporation filed its separate fiduciary duty claims. Despite the fact that the Court denied the corporation’s motion to amend its answer in the 220 Action, the corporation continued to investigate the fiduciary duty claims in the context of the 220 Action to support the claims it intended to raise in the separate action. Pursuant to the corporation’s bylaws, a director is entitled to advancement in connection with “defending any threatened or pending Proceeding.” The bylaws prohibit advancement “in connection with any Proceeding against the Corporation … provided, however, that this prohibition shall not apply to a counterclaim, cross-claim or third-party claim brought in any Proceeding.” Because the corporation continued to investigate the fiduciary duty claims during the course of the 220 Action even after denial of the motion to amend, the Court found that the fiduciary duty claims against the current director were “unquestionably threatened” at that time. Accordingly, the Court held that the current director was entitled to advancement of fees (including prejudgment interest) in connection with defending the fiduciary duty claims in the 220 Action and the separate action filed by the corporation.

Finally, the Court considered whether a director has standing to seek advancement under one agreement while receiving advancement pursuant to another agreement. In this case, both the former and current director served on the board as the designee of Steel Investment Company (“Steel”), a 33% stockholder in the corporation. Steel advanced costs to both of them for the 220 Action and the corporation’s fiduciary duty action on a voluntary basis. The Court distinguished the recent decision in Levy v. HLI Operating Company, Inc., 924 A.2d 220 (Del. Ch. 2007), and held that there was no loss of standing. Unlike the case in Levy, Steel was not obligated to advance any of the costs. The Court held that the voluntary nature of Steel’s advancement established standing for two reasons: (1) there was no assurance that plaintiff would not sustain any actual out-of-pocket loss as Steel could cease advancement at any time; and (2) to hold otherwise would inequitably reward the corporation for failing to discharge its advancement obligations.

The full opinion is available here