What makes a corporate officer an “officer”? For corporations, the issue of who qualifies as an officer is significant because corporations may be required to advance legal expenses and indemnify their officers pursuant to their certificates of incorporation, bylaws, or indemnification agreements. The issue is just as important for directors and officers’ liability insurers. Depending on the policy language, an individual may have to establish that he or she is or was a corporate director or officer in order to trigger coverage as an “Insured Person.”
On April 23, 2018, the United States District Court for the District of New Jersey held that it was bound by a June 13, 2016 Delaware Chancery Court decision with respect to the issue of whether a “Vice President” of Goldman Sachs Group (GSG) was an “officer” within the meaning of the GSG bylaws. In the July 13, 2016 Delaware Chancery Court decision, Vice Chancellor Laster held that the GSG vice president “failed to prove that someone who held the bare title of Vice President, but who otherwise held a position with the responsibilities of an employee, qualified as an officer for purposes of advancement under the Bylaws.”
The decision is significant because it means that courts may look beyond mere titles, and will instead examine the nature and scope of an individual’s “actual job responsibilities” in order to determine whether that person qualifies as an “officer.” For directors and officers’ liability insurers, whether coverage is available under the policy may turn on this very issue.
Plaintiff Sergey Aleynikov held the title of Vice President in the Equities Division of Goldman, Sachs & Company, a limited partnership and subsidiary of GSG. Mr. Aleynikov was a computer programmer who was responsible for developing and maintaining computer source code for Goldman’s high-frequency trading business.
Mr. Aleynikov was charged in a criminal complaint for allegedly transferring source code out of Goldman. He was indicted by a federal grand jury and convicted under the National Stolen Property Act and the Economic Espionage Act. The United States Court of Appeals for the Second Circuit ultimately reversed his convictions. Mr. Aleynikov incurred legal fees and expenses exceeding $2.3 million.
On September 25, 2012, Mr. Aleynikov sued GSG in the United States District Court for the District of New Jersey seeking advancement and indemnification for legal fees. Mr. Aleynikov argued that he was entitled to mandatory indemnification and advancement under GSG's bylaws as an “officer.” The court granted summary judgment to Mr. Aleynikov on the officer/fee advancement issue. The United States Court of Appeals for the Third Circuit reversed that decision, holding that the District Court had misapplied Delaware state law, and remanded the case back to the District Court.
Separately, on February 10, 2015, Mr. Aleynikov filed a related action in Delaware Chancery Court to obtain advancement and indemnification for legal fees incurred while defending counterclaims brought by GSG against Aleynikov.
The July 13, 2016 Delaware Chancery Court Decision
The Delaware Chancery Court (V.C. Laster) held that Mr. Aleynikov failed to prove that he was an officer within the meaning of the definition in the GSG bylaws. According to V.C. Laster, “Goldman Parent and its subsidiaries created ambiguity about the scope of the officer designation by handing out the title ‘Vice President’ freely to their employees.” In dicta, the court noted that:
The evidence presented at trial established that Wall Street firms as a whole, and Goldman Parent in particular, have engaged in a practice of title inflation whereby impressive sounding titles that historically would have carried real-world responsibilities have been disseminated widely. The evidence supports an inference that these titles have been used in lieu of other employment benefits, such as greater compensation. Goldman Parent and its subsidiaries easily could have clarified whether or not the title of “Vice President” was an officer title for purposes of advancement and indemnification.
Notwithstanding, the court noted that a corporation can avoid the doctrine of contra proferentem and can dispute an individual's entitlement to advancement rights by taking the position that:
Although the individual had a title that both traditionally denoted officer status and appears in the entity's bylaws as an officer's title, the individual's actual job responsibilities were not sufficiently akin to those captured by an external, common law concept of officer-ship to warrant the individual having advancement rights. [emphasis added]
The court then listed several factors which weighed in favor of non-officer status for Mr. Aleynikov:
Aleynikov did not have any managerial or supervisory responsibilities.
With respect to course of dealing evidence, Goldman appointed its officers by written consents. These written consents would not be persuasive if they "were not widely disseminated, and the [elected] individuals . . . were not held out as officers to the employee population of [Goldman].” According to the court, the evidence at trial showed that the written consents in fact were not widely disseminated, and although the individuals listed on the consents were held out as the executive officers of Goldman, they were not held out as the only officers of Goldman.
The evidence at trial also indicated that the appointments had a regulatory purpose and therefore were less persuasive as indications of what the term “officer” meant for purposes of advancement and indemnification.
Goldman’s practices when providing advancement or indemnification were also relevant. If Goldman never provided advancement or indemnification to vice presidents, then it would tend to support GSG’s position. If Goldman always provided advancement or indemnification to vice presidents, then that would support Mr. Aleynikov’s position. The evidence at trial showed that Goldman LP made discretionary decisions to provide advancement and indemnification to vice presidents and individuals who held titles below that of vice president.
The court considered whether there was a “readily-identifiable, industry-specific common meaning of the term officer” in the investment banking industry “such that its plain meaning would be apparent . . . to 'a reasonable person' in that industry.” GSG disavowed any reliance on a readily identifiable, industry-specific meaning of the term “officer.” Aleynikov's expert opined that the concept of an officer in the investment banking industry is the same as in other industries. Unfortunately, the trial record did not provide a convincing basis on which to construe the term "officer."
Therefore, based on this evidence from the trial, the court concluded that Mr. Aleynikov, who had the burden of proof, “failed to prove that someone who held the bare title of Vice President, but who otherwise held a position with the responsibilities of an employee, qualified as an officer for purposes of advancement under the Bylaws.”
The April 23, 2018 District of New Jersey Decision
On March 10, 2017, GSG and Mr. Aleynikov both moved for judgment on the pleadings in the New Jersey advancement and indemnification action. The essential dispute in the New Jersey action was whether the prior Third Circuit and Delaware decisions precluded re-litigation of the issue of whether Mr. Aleynikov, was an “officer” under the GSG bylaws. The court held that that the parties were barred by issue preclusion from re-litigating the issue of whether Mr. Aleynikov was an “officer”:
[This court] is doubly bound by the issue-preclusive effect of the prior Delaware judgment, which itself incorporated that same Court of Appeals decision. The Delaware court's decision now rebounds upon this court, constraining it to find that Aleynikov is not an officer. [emphasis added]
Key Takeaways and Practice Pointers for D&O Insurers
For D&O insurers, the Delaware Chancery Court’s opinion highlights the importance of requesting information at an early stage in order to confirm whether an individual with an officer-type title actually qualifies as an “Insured Person.” This information may not be readily available from the pleadings alone or the company’s bylaws. In this regard, V.C. Laster’s opinion provides a helpful roadmap for what information D&O insurers should be requesting with respect to this issue, including:
What are the individual’s specific managerial or supervisory responsibilities?
Does the company have written consents electing its officers? If so, are they widely disseminated?
Explain and provide information with respect to how the individuals listed on the written consents are held out to the company at large (i.e., as executive officers?)
Does the company appoint “officers” on a routine basis for regulatory purposes? How does the company decide officer appointments?
Has the company in the past provided advancement and indemnification for this particular individual (and/or for similarly situated individuals holding similar titles or with similar responsibilities?) How are these decisions made and on what basis?