Chancery Rules Corporation Cannot Offset Wife’s Recoupment Against Husband’s Advancement Simply Because the Pair Signed a Single Undertaking

Morris James LLP

Perryman v. Stimwave Tech. Inc., C.A. 2020-0079-SG (Del. Ch. Apr. 15, 2021)

Section 145 of DGCL permits corporations to grant advancement rights to persons who may be entitled to indemnification so that they may fund covered litigation costs pending indemnification. As part of this right, the DGCL also requires these individuals to undertake to repay the corporation if the advanced expenses ultimately prove not to be indemnifiable. In this case, the Court clarifies that two individuals who are married and execute the same undertaking nonetheless retain their individual rights to advancement and separate obligations for repaying any non-indemnifiable expenses.

Laura Perryman was the former CEO of Stimwave, and her husband, Gary Perryman, was a director. In earlier decisions, the Court concluded that Gary was entitled to advancement, but Laura was not. Both Perrymans signed the same undertaking representing that they would repay expenses if the Court ultimately determined they were not entitled to indemnification.

Stimwave claimed it had already advanced roughly $1.2 million to Laura when the Court concluded she was not entitled to advancement. Because the circumstances suggested Laura lacked resources to repay the advanced expenses, Stimwave argued that it should be allowed to credit the amounts incorrectly advanced to Laura against its ongoing advancement obligations to Gary. In Stimwave’s view, Laura and Gary signed a single recoupment undertaking, so the advancement and recoupment obligations were marital, shared, and thus, offsetable.

The Court rejected Stimwave’s novel argument. Initially, the Court noted that recoupment was premature because the Court had not determined whether Laura was entitled to indemnification; only a decision on indemnification triggered recoupment under the undertaking. Moreover, Gary and Laura had independent fiduciary obligations to Stimwave, and their advancement rights (and recoupment obligations) did not depend on their marital status. Because Delaware recognizes spouses’ independent property rights, allowing a set-off in these circumstances would be unwarranted and would undermine the purpose of advancement, which is to require payment for the defense of claims pending an indemnification decision.

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