Court of Chancery Rejects Limits on Advancement Rights

By statute and case law, Delaware has long protected the rights of officers and directors to advancement of fees and expenses incurred defending claims arising out of the officers and directors’ service. The public-policy rationale is that in the absence of such protection, qualified individuals would be reluctant to serve in management positions. Corporations whose documents are expansive in providing advancement, however, often are less generous when the time comes to advance company funds to someone the company believes has misused his or her position to the detriment of the company and its stakeholders. While a substantial body of case law has clarified many of the circumstances where directors and officers are entitled to advancement over the company’s objections, issues continue to arise that enable the court to provide fresh guidance. The recent case of Pontone v. Milso Industries, C. A. No. 8842-VCP (Del. Ch. August 22, 2014), sheds light on the nature of claims entitled to advancement, whether a right to third-party advancement vitiates a director or officer’s entitlement to advancement from the corporation itself, and the type of counterclaims that are subject to advancement.

Procedural Background

The underlying litigation giving rise to the advancement claims was brought in federal court in Pennsylvania by Scott Pontone’s former employers, two Delaware corporations, alleging that Pontone misappropriated confidential and proprietary information of his former employers wrongfully to solicit their employees and customers in breach of contract and common-law duties. Pontone filed certain counterclaims including for defamation and false advertising. On Aug. 23, 2013, Pontone filed his advancement action in the Court of Chancery. The defendants moved to dismiss on the ground that Pontone lacked standing because his new employer was obligated to advance funds and hence he suffered no injury. Pontone moved for summary judgment that he was entitled to advancement from his former employers. The court denied the defendants’ motion to dismiss predicated on the new employer’s obligation to advance and granted and denied in part Pontone’s motion for summary judgment.

Advancement by Reason of Former Corporate Office