A recent Delaware Court of Chancery decision acknowledged a pattern of corporations providing directors with advancement rights, and then when those directors attempt to exercise those rights, the corporations resist, claiming that exceptional circumstances exist that require the court to deviate from the principles of law granting advancement, see Nielsen v. EBTH, C.A. No. 2019-0164-MTZ at *2 (Del. Ch. Sept. 30, 2019). In Nielsen, Vice Chancellor Morgan T. Zurn made it clear that few cases present facts that will cause the court to deviate from "Delaware's standard favoring advancement."

In Nielsen, the court decided "whether the plaintiffs [were] entitled to advancement of fees and expenses incurred in a separate action. Ultimately, the court held that the plaintiffs were entitled to advancement, reasoning that the plaintiffs were parties to the separate action only "by reason of the fact" they served as directors or officers of the corporation.

The corporation granted mandatory advancement rights to the plaintiffs, officers or directors of the corporation, in the corporation's certificate of incorporation and in separate agreements. "While serving in their corporate roles, the plaintiffs sold their stock in the company in a private transaction." Although the corporation was not a party to the transaction, the corporation signed a nondisclosure agreement with the buyer of the stock that allowed the buyer to obtain the corporation's confidential and proprietary financial information, from the plaintiffs, regarding the transaction.

After that agreement was in place, the "plaintiffs allegedly provided the buyer with false, misleading or otherwise incomplete information about the company's financial status, and did so on the company's behalf." That information was material to the buyer's decision to purchase the plaintiffs' stock. The buyer sued the plaintiffs and the plaintiffs asked for advancement, but the corporation refused. The plaintiffs filed suit against the corporation and moved for summary judgment.

In opposing summary judgment, the corporation contended that the plaintiffs were not entitled to advancement because the plaintiffs were not acting as officers or directors of the corporation in the underlying action. The corporation further argued that advancement was not appropriate "because the plaintiffs sold the stock in their individual capacities and because the company was not a party to the transaction and owed no duty to the buyer."

The relevant advancement provisions incorporated the "by reason of fact" standard from Section 145 of the Delaware General Corporation Law (DGCL). "An advancement claim arises 'by reason of fact' of a person's corporate status if there is a nexus or causal connection between any of the underlying proceedings contemplated by Section 145(e) and one's official corporate capacity."

In granting the plaintiffs' motion for summary judgment, the court held that the plaintiffs were entitled to advancement since they were a party to the underlying action because of their roles as officers and directors of the corporation. The court explained that "the fact that the plaintiffs entered into the [transaction] as individual sellers and not in their formal capacities as officers and directors of the company is not dispositive. The court further explained that the nondisclosure agreement the corporation signed specifically identified the plaintiffs "as agents and controlling 'principals'" of the corporation, and that the underlying claims for wrongdoing against the plaintiffs allege that the plaintiffs committed the acts in their official capacity.

For example, the complaint alleged that the plaintiffs were able to share the false, misleading or incomplete information because they were company "insiders." As a result, the court held that because the plaintiffs will be required to defend their actions as officers and directors of the corporation, they were entitled to advancement.

In arriving at its holding, the court noted that "summary judgment is an efficient" and appropriate method to expeditiously resolve advancement disputes." The court also reiterated the well-established policy rationale for advancement: "Advancement attracts capable individuals into corporate service by providing corporate officials with immediate interim relief from the personal out-of-pocket financial burden of paying the significant on-going expenses inevitably involved with investigations and legal proceedings."

The key takeaways are that the court: rarely is persuaded by corporations' attempts to establish that its case presents exceptional facts that should cause the court to put aside the well-established standards favoring advancement; and may award advancement even when directors or officers entered into the transaction in what may appear "on the surface" to be their individual capacities.

Francis G.X. Pileggi is a litigation partner and vice chair of the commercial litigation practice group at Eckert Seamans Cherin & Mellott. His email address is [email protected]. He comments on key corporate and commercial decisions, and legal ethics rulings, at www.delawarelitigation.com.

Chauna A. Abner is an associate in the commercial litigation practice group of the firm.