Holley v. Nipro Diagnostics, Inc., C.A. No. 9679-VCP (Del. Ch. Dec. 23, 2014) (Parsons, V.C.)

In this memorandum opinion, the Court of Chancery granted partial summary judgment in favor of a former director on his advancement claims relating to his defense of a pending SEC civil lawsuit alleging insider-trading violations.  In so holding, the Court determined that the director’s prior guilty plea in a criminal action that related to the same underlying conduct did not preclude advancement of the director’s expenses in the SEC civil action. 

The plaintiff, George H. Holley, was an officer and director of Home Diagnostics, Inc. (“HDI”).  In 2010, HDI was acquired by the defendant, Nipro Diagnostics, Inc. (“Nipro”).  As part of the acquisition, Nipro assumed HDI’s contractual obligations, including the advancement and indemnification obligations contained in HDI’s Certificate of Incorporation and an indemnification agreement between HDI and plaintiff, which provided the plaintiff with broad mandatory indemnification and advancement rights.

Shortly after the acquisition was announced, the SEC investigated the plaintiff for suspicious trading activity.  In January 2011, the SEC charged the plaintiff with violating federal securities laws by disclosing material non-public information about the anticipated transaction with Nipro to friends and relatives (the “SEC Action”).  In February 2011, after an investigation by the United States Attorney’s Office, a grand jury indicted the plaintiff for orchestrating and executing an insider-trading scheme in violation of federal law (the “criminal matter”).  In 2012, the criminal matter was resolved when the plaintiff pled guilty to two counts of insider trading in exchange for the government dismissing the other three counts against him.

Nipro initially advanced $175,000 to the plaintiff for his defense of the investigations, but it later disputed its obligation to advance fees and expenses after the SEC Action was filed.  In 2012 and 2014, Nipro commenced suits in Florida seeking to recoup the funds it had advanced the plaintiff.  Two of the earlier Florida suits were dismissed and one remained pending.  In May 2014, the plaintiff filed a complaint in the Court of Chancery, seeking advancement relating to the SEC Action and the Florida actions, as well as “fees on fees”—i.e. reimbursement of the fees and expenses he incurred in enforcing his right to advancement in the Delaware action.  Nipro moved to dismiss or stay the Delaware action in favor of the Florida action that was still pending.  The plaintiff contested the motion and also moved for partial summary judgment on his advancement claims.

The Court declined to dismiss or stay the action, finding that the plaintiff’s right to promptly and summarily adjudicate his advancement claims outweighed Nipro’s desire to avoid having to litigate outside of Florida.  The Court also determined that the claims in the pending Florida action related only to Nipro’s attempt to recoup previously advanced funds, and thus were not functionally equivalent to the plaintiff’s Delaware advancement claim.

In granting plaintiff’s motion for partial summary judgment, the Court first determined that the plaintiff was made a party to the SEC Action “by reason of the fact” that he was acting as an officer or director of HDI as contemplated by 8 Del. C. § 145.  The Court found that the pleadings in the SEC Action “undeniably” focused on the plaintiff’s position as chairman of the board of directors, which gave him extensive and broad access to inside information which the plaintiff allegedly misused.

Next, the Court considered Nipro’s argument that the plaintiff was not entitled to advancement in connection with the SEC Action because he pled guilty to insider trading in the criminal matter.  Nipro sought to invoke a carve-out contained in the indemnification agreement, which precluded indemnification “[for] any violation of any federal, state, or foreign statutory laws or regulations [proscribing] insider trading.”  The Court, however, found that the plain language of the carve-out addressed only indemnification, not advancement, and thus did not preclude advancement for defending against allegations of insider trading.  The Court explained that the right to advancement of fees and expenses while litigation is ongoing is distinct from the right to indemnification, which necessarily can occur only after the conclusion of the underlying litigation.  The Court further explained that even though the plaintiff had pleaded guilty to certain insider trading offenses, there were still many ways in which the plaintiff could be “successful on the merits or otherwise” in the SEC Action, in which case he would be entitled to mandatory indemnification under 8 Del. C. § 145.  Thus, it was not a foregone conclusion that the plaintiff would be required to repay Nipro for any advancement because the plaintiff could still prevail on procedural grounds or the SEC could voluntarily terminate the SEC Action.

For these reasons, the Court granted the plaintiff’s partial motion for summary judgment for advancement of fees in connection with the SEC Action and the Florida action.  The Court also awarded the plaintiff 100% of the reasonable “fees on fees” he incurred in enforcing his right to advancement in the Delaware action.

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