Andrew C. Nielsen v. EBTH Inc., C.A. No. 2019-0164-MTZ (Del. Ch. Sept. 30, 2019) (Zurn, V.C.)
In this memorandum opinion, the Delaware Court of Chancery granted plaintiffs’ motion for summary judgment, holding that plaintiffs, as former officers and directors of the defendant company, are entitled to advancement of fees and expenses incurred by them in connection with a lawsuit arising from the sale of plaintiffs’ shares of stock of the defendant company.
Plaintiffs agreed to sell their shares of stock of the defendant company to a third party buyer. The defendant company facilitated the transaction in a variety of ways. In particular, the defendant company executed a non-disclosure agreement with the buyer and agreed to make certain confidential and non-public information available to the buyer.
Prior to the closing of the stock sale, plaintiffs made a series of representations to the buyer regarding the defendant company’s financial vitality. The defendant company’s pitch deck, company financial projections, and other company information and materials were provided to the buyer, and plaintiffs communicated with the buyer regularly through their company email addresses. A series of post-closing communications, however, revealed to the buyer that the actual financial state of the defendant company was materially different than plaintiffs and the defendant company represented prior to closing. As a result, the buyer filed a lawsuit against plaintiffs and the defendant company in connection with the alleged misrepresentations.
Because Plaintiffs were entitled to mandatory advancement under the defendant company’s organizational documents and applicable indemnification agreements, they requested advancement of fees and expenses in connection with the buyer’s lawsuit. The defendant company rejected the advancement request. This suit followed.
The defendant company’s primary argument against advancement was that plaintiffs sold their stock in their individual capacities and were not parties to the buyer’s lawsuit by reason of the fact that plaintiffs served as officer or directors of the defendant company, which was a requirement for mandatory advancement. The Court disagreed.
The Court explained that an advancement claim arises by reason of the fact of a person’s corporate status if there is a nexus or causal connection between any of the underlying proceedings and one’s official corporate capacity. The Court further explained that “by reason of the fact” language is interpreted broadly and in favor of advancement and includes all actions brought against an officer or director for wrongdoing that such person committed in such person’s individual capacity and for all misconduct that allegedly occurred in the course of performing day-to-day managerial duties. The Court stated that the requisite nexus exists if corporate powers were used or necessary for the commission of the alleged misconduct or the underlying claim is inextricably intertwined with the actions in the person’s former capacity as an officer or director such that the person would necessarily be required to defend those actions and possibly disprove allegations that he or she acted improperly in those capacities. Moreover, the Court noted that where the claims asserted against a defendant in an action are based on the misuse of confidential information that the defendant learned in his or her official corporate capacity, that action qualifies as being asserted by reason of the fact of that corporate capacity.
The Court held that the requisite nexus existed under the circumstances. In particular, the Court referenced the fact that (i) the buyer’s lawsuit explicitly and repeatedly challenges plaintiffs’ conduct as officers and directors of the defendant company and alleges that plaintiffs acted on the defendant company’s behalf and in their roles as agents and managers that directed and controlled the defendant company, and (ii) plaintiffs accessed and shared (or purposefully withheld) the defendant company’s confidential financial information with the buyer, and the buyer relied on this information and its accuracy because plaintiffs were company insiders.