January 28, 2013

Delaware Chancery Court Dismisses Action for Advancement of Legal Fees and Expenses

Holland & Knight Bulletin
Eric S. Almon

In a recent letter opinion, the Delaware Chancery Court dismissed an action brought under 8 Del. C. §145(e) for advancement of legal fees and expenses. Plaintiff David F. Miller III previously served as president, chief executive officer and director of the defendant Palladium Industries, Inc. and its subsidiary VisionAid, Inc. In 2011, VisionAid sued Miller for breach of fiduciary duty as an officer and director of VisionAid and Palladium, as well as for misappropriation, waste and conversion. When Miller sought advancement from Palladium for the fees and expenses incurred in defending himself, Palladium's board rejected Miller's request, finding that to do so would not be in the company's best interest. Miller then sued Palladium for advancement of the legal fees and expenses, asserting that Palladium's bylaws provided for mandatory advancement.

Article X, Section 1 of Palladium's bylaws provides that each person who was or is a director or officer of the corporation shall be indemnified and that expenses incurred by such person shall be paid by the corporation in advance of a final disposition. However, Section 5 of the bylaws goes on to state that such expenses shall be paid in advance by the corporation "unless otherwise determined by the Board of Directors in the specific case."

The question for the court was whether the language in Section 5 of the bylaws converted what otherwise seems to be a mandatory right to advancement into one that remains subject to the board's taking action specifically to reject the advancement request. The court began by noting that while Delaware policy favors indemnification and advancement as a means of attracting individuals to serve in corporate capacities,Delaware law does not require advancement. Therefore, "absent a bylaw or contractual provision that makes advancement mandatory, Delaware law leaves the decision to advance expenses to the business judgment of the board."

The court then turned to Palladium's bylaws, finding the two sections unambiguous: "[t]he only reading of Palladium's advancement provision is that advancement shall be paid ... unless Palladium's board specifically determines not to pay a specific advancement." Failure of the board to act within a specified time after receipt of the request for advancement would leave the request a mandatory one. Here, however, the court stated the board acted in a timely fashion by responding to Miller's request within approximately 30 days. As a result, the court entered judgment in favor of Palladium and dismissed Miller's action.


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