Delaware Court of Chancery Denies Indemnification for Former CEO and Provides Color on Entitlement to Proportional Indemnification

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In Evans v. Avande, Inc., C.A. No. 2018-0454-LWW (Del. Ch. June 9, 2022), the Delaware Court of Chancery found that a health care services company did not have to pay legal expenses for its former CEO, who had ultimately been found liable for breaching his fiduciary duties to the company. The decision expanded on an earlier decision issued by the Court at the summary judgment stage of the litigation, Evans v. Avande, Inc., C.A. No. 2018-0454-LWW (Del. Ch. Sept. 23, 2021), which addressed indemnification under Section 145 of the Delaware General Corporation Law regarding whether indemnification can be proportionate to the extent that the party seeking indemnification was not 100 percent successful in the underlying litigation.

Litigation between the parties began in 2018. The plaintiff, Shawn Evans, served as CEO of the defendant, Avande, Inc., for approximately two years. He was later fired by Avande. An internal audit by Avande revealed various “suspect transactions” by Evans during his tenure, and as a result, Avande brought suit against Evans alleging breach of fiduciary duty, tortious interference, and defamation, among other claims. Following a trial in April of 2019, the court held that Evans had breached his fiduciary duty of loyalty in connection with certain but not all transactions. The court also held that Avande abandoned various claims, including its tortious interference and defamation claims. In other words, Evans had successfully defeated at least some of the claims against him.

Evans sought indemnification for fees and expenses incurred through the initial action brought against him. Evans claimed he was entitled to indemnification under 8 Del. C. § 145, Avande’s bylaws, and Avande’s certificate of incorporation. Evans filed a motion for summary judgment on indemnification, which the Court granted in part and denied in part, leaving open the issue of whether Evans was entitled to partial indemnification on the breach of fiduciary duty, tortious interference, and defamation claims brought against him.

At trial, Evans claimed that he was entitled to indemnification under 8 Del. C. § 145, which provides that a former officer of a corporation is entitled to mandatory indemnification for expenses incurred in an action provided that the individual had “been successful on the merits or otherwise” in defense of such action. In assessing whether an individual had been successful on the merits, Delaware courts look to the outcome of the underlying action and assess whether the individual had been made a party to the action based on the fact that they served as an officer of the organization. In Evans, the Court addressed two questions in assessing Evans’ entitlement to indemnification: (1) whether the tortious interference and defamation claims brought against Evans were in connection with his former role as CEO of Avande, and (2) whether Evans had partially succeeded on the claim of breach of fiduciary duty brought against him.

In assessing whether the tortious interference and defamation claims brought against Evans were in connection with his former role as CEO of Avande, the Court focused on whether there was a causal connection between the underlying claims and Evans’ corporate role within Avande. The Court noted a causal connection exists if the corporate role was necessary to achieve the alleged misconduct. The vice chancellor rejected Evans’ argument that a causal connection existed, as the claims concerned his use of confidential information. Instead, the Court agreed with Avande’s argument, concluding that the claims concerned Evans’ actions following his termination and there was “no link to Evans’ role as an officer or director.”

In assessing the confidential information aspect in connection with the indemnification claim, Delaware courts look to whether such use of confidential information was explicitly alleged in the underlying action. The Court found that the complaint in the underlying action did not allege that Evans used confidential information in support of the claims at issue and therefore no causal connection existed. Absent the causal connection between the underlying claims and Evans’ corporate role, Evans was not entitled to mandatory indemnification for the tortious interference and defamation claims.

In assessing whether Evans had partially succeeded in defending the claim of breach of fiduciary duty brought against him, the Court rejected Evans’ argument that he was entitled to partial indemnification because partial judgment was entered in his favor for certain transactions. The Court reiterated that Evans’ assertions had already been addressed and rejected in the underlying action, stating, “Notwithstanding his efforts at repackaging it, Evans’ theory of proportional indemnification is no more persuasive now than it was earlier in this case,” and “Evans did not raise any new evidence or precedent supporting his theory that the ratio between damages sought and awarded is the basis by which one’s success in an underlying proceeding should be measured.” Additionally, the Court noted that in determining whether an individual had succeeded in defending a claim, the courts look to the outcome of the underlying action. The Court noted the underlying action “plainly demonstrate[d]” Evans breached his fiduciary duty of loyalty to Avande. The Court, therefore, held Evans was not entitled to partial indemnification on this claim and entered judgment in favor of the defendant.

In Evans, the Delaware Court of Chancery further elucidated what entitles an individual to indemnification, noting factors Delaware courts consider in assessing whether a party is successful in defending a claim. Evans alsoexpanded on the use of confidential information in establishing a causal connection between an individual’s alleged misconduct and their corporate role. The Court elaborated on the concept of proportional indemnification, holding that in assessing damages, courts look to the outcome of the underlying action. All of these are valuable lessons for both plaintiffs and defendants, who all too often throw good money after bad in the context of indemnification and advancement disputes.

*Rachel Santos, a summer associate at McCarter & English not yet admitted to the bar, contributed to this alert.

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