In a recent opinion issued by the Delaware Court of Chancery, Perryman v. Stimwave Technologies, Inc., C.A. No. 2020-0079-SG, the Vice Chancellor Glasscock ruled upon whether directors of a Delaware corporation were entitled to advancement under the corporation’s bylaws, pursuant to 8 Del. C. § 145(e). This opinion is an important read for litigators and practitioners as it provides a helpful roadmap for those parties seeking advancement under Delaware law.
In Perryman, whether the directors were entitled to advancement centered around whether the company’s charter amendment required approval of its Series D equity holders, and if so, whether the indemnification agreements at issue were executed before the amendment to the charter went in place, as the Court found that no approval was received from Series D equity holders.
Stated differently, the Court phrased the two “deceptively simple-sounding questions” before it as follows: “(1) does Respondent Stimwave’s certificate of incorporation, post a 2018 amendment, require approval of indemnification agreements by the company’s Series D equity holders, and (2) if so, did the Petitioners, Laura Perryman, the former CEO of Respondent Stimwave, and her husband, Stimwave Director Gary Perryman, sign and execute their indemnification agreements before the amendment?” Slip op. at 2.
The Court of Chancery provided several helpful “nuggets” of practical advice pertaining to advancement claims. In one such example, Vice Chancellor Glasscock noted:
While the contractual rights to advancement are often straightforward, these benefits have generated an inordinate amount of litigation. The reason is easy to identify; where the corporation itself is suing an indemnified individual for what it believes to be malfeasance or breach of duty to the corporation, its principals find it galling to be footing both the costs of prosecuting, and defending, the same litigation. Given the contractual rights involved, however, it is unusual in my experience for a defense to a demand for advancement to be wholly successful.
Slip op., at 1-2.
After a detailed discussion in the memorandum opinion, the Court ultimately found that Mr. Perryman’s advancement agreement was valid and enforceable, because it was executed prior to date of the charter enactment. However, the Court found that Ms. Perryman’s advancement agreement was executed after the adoption of the charter amendment, and because the charter amendment required approval from Series D equity holders, the Court held that Ms. Perryman was not entitled to indemnification.
This decision is an important read for any director or officer seeking advancement of their claims. Although advancement is permitted under Delaware law, it is necessary that any agreement conferring advancement rights upon a director or officer comply with any requirements set forth in the operative governing documents.