Xu Hong Bin v. Heckmann Corporation, C.A. No. 4802-CC (Del. Ch. Jan. 8, 2010) (Chandler, C.)

In this letter opinion, Chancellor Chandler denied a plaintiff’s motion for summary judgment seeking advancement of expenses, finding that the relevant provisions in the corporation’s organizational documents permitted the corporation to place reasonable terms and conditions on a director’s right to advancement, and refusing to conclude that the advancement provisions in the bylaws, which qualified the basic advancement rights in the charter, necessarily conflicted with the charter.

The underlying disputes at issue were related to the merger of China Water, a Chinese bottling company founded by the plaintiff Xu Hong Bin (“Xu”), into a subsidiary of Heckmann Corporation (“Heckmann” or “the Company”). Xu initially filed an action against Heckmann for specific performance, alleging that Heckmann refused to perform provisions of an escrow resolution and transition agreement (the “ERTA”), enacted to address ongoing sales declines at China Water following its merger with the Company. Heckmann subsequently filed an answer and counterclaim, lodging three counts against Xu. Xu then commenced the instant action seeking advancement of the expenses he incurred or would incur in defending himself against Count I of Heckmann’s counterclaim, which alleged claims for breach of fiduciary duty. Xu also sought indemnification for the expenses he incurred defending himself against Count III, which alleged a claim for conversion. The Chancellor previously dismissed Count III for failure to state a claim.

The Court first considered which organizational documents were relevant to Xu’s requests for advancement and indemnification. Although China Water’s charter provided mandatory advancement and indemnification rights, the Court found that Heckmann’s claim against Xu failed to arise “by reason of” Xu’s status as a director of China Water, accepting as binding Heckmann’s representations that Heckmann was pursuing claims against Xu in Counts I and III in Xu’s capacity as a director of Heckmann, and not as a director of China Water. Based upon Heckmann’s assertions, the Court determined that no causal connection or nexus existed between Heckmann’s underlying claims and Xu’s capacity as an officer or director of China Water, and Xu was therefore not entitled to advancement or indemnification for Counts I or III under China Water’s charter.

Turning to Heckmann’s organizational documents, the Court considered Xu’s argument that a provision contained in Heckmann’s charter provided for mandatory advancement. Heckmann claimed that although the charter gave Xu a right to advancement, it must be read in conjunction with Section 6 of Heckmann’s bylaws, which provided that expenses “may be so paid upon such terms and conditions, if any, as the Corporation deems appropriate.” (emphasis in original).

Xu argued that Section 6 of Heckmann’s bylaws conflicted directly with Heckmann’s charter, in violation of Section 109(b) of the General Corporation Law of the State of Delaware, and that any limitations on advancement rights should have been included in Heckmann’s charter provision. The Court disagreed, holding that Heckmann was entitled to place reasonable restrictions on Xu’s right to advancement. The Court based its holding on two relevant facts: (i) Heckmann’s charter and bylaws were adopted simultaneously, and the two provisions at issue were not difficult to reconcile; and (ii) both the charter and bylaws were in full force and effect when Xu began his directorship at Heckmann, and the Chancellor “proceed[ed] on the assumption that directors of Delaware corporations read the [charter] and bylaws before joining the board, particularly those provisions that relate to indemnification and advancement rights.” The Court declined to elaborate on the potential outcome of its decision had Section 6 of Heckmann’s bylaws been enacted at some point subsequent to the adoption of the charter, limiting its decision explicitly to circumstances where a corporation’s charter and bylaws are adopted simultaneously.

In addition, the Court held that Xu was entitled to indemnification under Section 145(c) of the General Corporation Law of the State of Delaware and the Heckmann charter for reasonable expenses incurred in defending Count III, which was dismissed. The Court held, however, that Xu was not entitled to prejudgment interest on amounts advanced to him because he was required to comply with reasonable restrictions placed on his advancement rights by Heckmann. The Court also held that Xu was not entitled to “fees-on-fees” incurred either in seeking advancement rights, since he was not successful on that claim, or for seeking indemnification for expenses incurred in defending Count III, since Heckmann had not disputed Xu’s right to indemnification related to Count III.

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