In a notable opinion that impacts how Delaware corporations consider advancement of litigation expenses to their officers and employees, the Delaware Chancery Court signaled that, when corporations grant a right to advancement of litigation expenses, the corporation should take extra care in how it defines who is entitled to such advancement. An imprecise definition or description of those entitled to advancement may result in a corporation incurring much greater advancement expenses than it might have anticipated.
Background
As a matter of public policy, Delaware seeks to encourage the most capable individuals to serve in corporations by providing for indemnification of, and advancement of expenses to, directors, officers, and other personnel under certain circumstances. The Delaware General Corporation Law (DGCL) §145(e) provides that a corporation may—but is not required to—commit itself to advance funds to officers, directors, and others for litigation expenses when such individuals are sued in connection with their service to, or at the request of, such corporation.
Gilbert v. Unisys Corp.1 involved two former employees serving as “vice presidents” within a business unit of a company, with one of the employees also serving for a period as the president of a subsidiary. After the individuals left the company for a competing business, the company sued, alleging that the former employees misappropriated company information. As the litigation progressed, the former employees sought advancement of expenses under the company’s certificate of incorporation (the “Certificate”).
The Certificate largely followed the language of DGCL §145, stating that the company would indemnify and pay in advance the litigation expenses of individuals involved in a legal action by reason of the fact that they (1) served as directors or officers of the company or (2) served at the request of the company as a director, officer, employee, or agent of another corporation, partnership, joint venture, trust, or other enterprise. Neither the Certificate nor the bylaws of the company expressly defined “officer.” However, the bylaws identified certain “mandatory” officer roles—including vice president—to be chosen by the board, as well as other “discretionary” officers to be appointed either by the board or by other officers with authority delegated from the board.
In a post-trial opinion, the court analyzed the Certificate and bylaws of the company using rules of contract interpretation and held that the former employees were officers entitled to advancement.
Key Points
Under DGCL §145, advancement rights are not mandatory, and corporations have the flexibility to grant them to broad groups of people or to narrow subsets or to none at all. Gilbert serves as a reminder that, in preparing corporate charter documents, drafters should carefully consider the intended scope of the company’s advancement rights and ensure that the charter documents accurately reflect that scope.
Whether forming a new corporation or evaluating existing advancement rights, Gilbert should prompt corporations to evaluate their advancement rights through the strictures of Delaware contract-interpretation rules. The key is to avoid ambiguity—as the points below illustrate, ambiguous advancement provisions are interpreted in favor of the party seeking advancement, and may expose the corporation to more advancement expense than intended.
- Beware of granting advancement rights to undefined “officers.” When advancement provisions do not provide a definition of “officer,” Delaware courts will likely interpret the term broadly to cover all individuals with an officer-like title. In Gilbert, the company had argued that vice presidents were only officers if they had been elected by the board (which the executives had not been) or appointed as a subordinate officer. The court rejected this argument and held that the charter documents were ambiguous at best, and that such ambiguity must be resolved in favor of the party seeking advancement. Ruling for the former employees, the court held that “reasonable individuals who are hired as [the corporation’s] Vice Presidents by persons with authority to bestow the title can reasonably conclude under the Bylaws that they are officers of the Company.” This was true even though the company had “doled out” a large number of vice president titles to employees because—in line with Delaware policy—executives choosing to serve a corporation should be able to clearly understand from the charter documents whether they are entitled to advancement.
- In some circumstances, a parent company may be obliged to advance funds to an officer of a subsidiary. The Gilbert court looked beyond corporate formalities to hold that service as an officer to a wholly owned subsidiary of the company did not impede an employee’s right to advancement under the parent company’s charter. The company had argued that the service of one of the former employees as president of a subsidiary did not qualify for advancement because, technically, he was not serving at the request of the company (he was appointed by the subsidiary’s board and not the company’s board) and was being sued by reason of his service to the subsidiary and not his service to the company. The court rejected these arguments, noting that Delaware interprets “by reason of” broadly in favor of advancement. It held that (1) the former employee was serving at the request of the company because, over the course of a single day, the company had acquired the wholly owned subsidiary and elected a new board (comprised of company employees), which board had appointed the former employee as president; and (2) the former employee was being sued by reason of his service to the company because the company’s suit alleged he misappropriated company information that he could have obtained while serving as an officer of the subsidiary.
- Advancement applies to employees of an “enterprise.” The Certificate largely tracked the language of the DGCL, granting advancement rights to directors, officers, employees, or agents of an “enterprise,” and the court read this term expansively to include “non-legal” entities, such as business units and other inter- or intra-company entities. The company had argued that “enterprise” referred only to legal entities and raised the technical objection that the former employees’ service to an unincorporated business unit did not qualify for advancement. The court held that by largely copying the language of DGCL §145 into the charter without express limitations, the company signaled an intent to grant indemnification and advancement rights to the fullest extent permitted by law. Interpreting the statutory language, the court concluded that since “enterprise” was listed alongside legal entities and “non-legal” entities (e.g., joint ventures), the term was not intended to limit advancement to only the enumerated individuals acting in service of legal entities.
1 C.A. No. 2023-0513-PAF (Del. Ch. August 13, 2024, Fioravanti, V.C.).
