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Hyatt v. Al Jazeera America Holdings II, LLC, et al., C.A. No. 11465 (Del. Ch. March 31, 2016) (V.C. Glasscock).

March 31, 2016

In this memorandum opinion, the Court of Chancery ruled on cross-motions for summary judgment that plaintiffs were entitled to advancement for defending the majority of defendants’ counterclaims in the underlying action.

In the underlying action, two former officers and directors of Current LLC brought a claim against Al Jazeera. Al Jazeera acquired Current through a merger.  Under the Merger Agreement one of the now plaintiff officers was named the Members’ Representative.  Following the merger, Al Jazeera submitted claims to the Members’ Representative for indemnification from an escrow fund established pursuant to the Merger Agreement.  The officers filed a claim seeking invalidation of the indemnification claims as an improper breach of the Merger Agreement, and seeking an award of the remaining balance of the escrow fund.  Al Jazeera counterclaimed, contending that the officers breached the Merger Agreement by rejecting the indemnification claims.  The question before the Court of Chancery was whether the counter-claims triggered the officers’ advancement rights under the Merger Agreement.

The Court of Chancery first examined the terms of the Merger Agreement. Al Jazeera argued that a fee-shifting provision in the Merger Agreement reflected the parties’ intent to provide only for indemnification and not advancement in connection with actions regarding the escrow fund.  The officers argued that the provision was limited to shifting fees following the final resolution of an action regarding the escrow fund.  The officers pointed to a different section of the Merger Agreement, which stated Al Jazeera “will indemnify and advance expenses to Current’s former officers and directors to the extent provided in the Operating Agreement.”  Thus, the officers argued that Current’s Operating Agreement controlled.

Reading the Merger Agreement as a whole to determine the intent of the parties, the Court of Chancery concluded that the officers held advancement rights in connection with the underlying litigation. The Court noted that advancement and indemnification are distinct rights.  Emphasizing that the language regarding fee-shifting did not displace the right to advancement outlined in the Merger Agreement and Operating Agreement, the Court explained “[t]he fee-shifting provision is distinct from, and does not conflict with the right to advancement for former officers and directors.”

The Court of Chancery then determined that the correct standard to decide whether advancement rights were triggered was whether the counterclaims had a “nexus or causal connection” to the officers’ “official corporate capacity.” Although the Operating Agreement involved an LLC, the Court applied reasoning and case law from the context of corporate indemnification under Section 145 of the Delaware General Corporation Law due to both the language used in the Operating Agreement and the emphasis on corporate case law in the parties’ briefing.  Reviewing each count of Al Jazeera’s counterclaim, the Court of Chancery found that the majority of the counterclaims centered on whether Current breached representations and warranties at the time of the merger.  Finding that the relief sought by the counterclaims would, if granted, impose individual liability on the officers, the Court of Chancery held that the majority of the claims held a nexus to the officers’ corporate capacity.  Specifically, the Court emphasized that the majority of the underlying claims implicated the officers’ actions negotiating the merger, separate from acting as the Members’ Representative.  Finding that the majority of the underlying claims required defending actions taken in the officers’ official capacity, the Court held that advancement rights were triggered for those claims.

The full opinion is available here