Chancery Court Provides Guidance on Advancement, Indemnification Under Delaware Law

In a question of first impression, the Delaware Court of Chancery considered whether and to what extent discovery is necessary to determine whether a fiduciary acted with the requisite good faith to justify permissive indemnification under (1) Delaware General Corporation Law, (2) the organic documents of K-V Pharmaceuticals Inc. and (3) an indemnification agreement between the company and its former chief executive officer, Marc Hermelin, that made mandatory the permissive advancement and indemnification provisions of the DGCL. Vice Chancellor Sam Glasscock III’s decision inHermelin v. K-V Pharmaceutical Co. recognizes the procedural realities underlying summary advancement and indemnification proceedings and is instructive for several reasons.

First, the court clarified the scope of indemnification and advancement permissible under Delaware’s statutory regime. As the court wrote in the opinion, Delaware law "sets two boundaries for indemnification: The statute requires a corporation to indemnify a person who was made a party to a proceeding by reason of his service to the corporation and has achieved success on the merits or otherwise in that proceeding [mandatory indemnification]. At the other end of the spectrum, the statute prohibits a corporation from indemnifying a corporate official who was not successful in the underlying proceeding and has acted, essentially, in bad faith."