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E-MailThis post is from Eric S. Wilensky and Angela L. Priest of Morris, Nichols, Arsht & Tunnell LLP. This post is part of the Delaware law series, which is cosponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.
In the current recessionary environment, rather than looking outward for the next big deal, many corporations are turning their focus inward, reviewing and shoring up their own governance structures, defensive mechanisms, indemnification schemes and governing documents. Knowledge of recent Delaware jurisprudence is helpful in such a review, as in numerous instances over the past year, the Delaware courts have released opinions addressing and interpreting corporate charter and bylaw provisions and indemnification agreements. This article surveys the relevant Delaware developments, which are summarized briefly below.
Bylaw Provision Cases
Bylaw provisions were a hot-button issue in 2008, with Delaware court opinions touching on advance notice, proxy expense reimbursement and indemnification and advancement provisions. Two of the most talked-about corporate opinions of 2008, JANA Master Fund, Ltd. v. CNET Networks, Inc. and Levitt Corporation v. Office Depot, Inc., focused on the legal interpretation of advance notice bylaw provisions, making clear in each case that the Delaware courts will likely construe such provisions strictly, and where ambiguous, in favor of the stockholder franchise.
The Delaware Supreme Court, on certification from the SEC, also weighed in on the legality of proxy expense reimbursement bylaw provisions in CA, Inc. v. AFSCME Employees Pension Plan, and the Delaware legislature thereafter approved amendments to the DGCL that will specifically allow corporations to include proxy reimbursement and proxy access provisions in their bylaws.
Finally, numerous opinions by the Delaware courts involved the interpretation of indemnification and advancement bylaw provisions. Specifically, the Court of Chancery discussed when indemnification and advancement rights vest (spurring the approval of legislation that clarifies this issue) and provided guidance on “fees on fees” awards in Schoon v. Troy Corp. The Delaware Court of Chancery also interpreted the terms “defense” (Reinhard v. The Dow Chemical Company, Zaman v. Amedeo Holdings, Inc., Duthie v. CorSolutions Medical, Inc. and Sun-Times Media Group, Inc. v. Black), “agent” (Jackson Walker LLP v. Spira Footwear, Inc. and Zaman), “proceeding” (Donohue v. Corning) and “final disposition” (Sun-Times), which terms consistently appear in indemnification and advancement bylaws.
Charter Provision Cases
In 2008 and early 2009, the Delaware courts also addressed Section 102(b)(7) charter provisions (limiting monetary liability for directors for breaches of the duty of care) in a series of fiduciary duty cases, beginning with Ryan v. Lyondell Chemical Co., in which the Court of Chancery denied a motion to dismiss a claim that non-conflicted directors breached their duty to act in good faith with respect to a transaction that would provide stockholders with a large premium for their shares. Subsequent cases, including McPadden v. Sidhu, In re Lear Corporation Shareholder Litigation and the Delaware Supreme Court’s reversal of Lyondell, however, made clear that such provisions remain a powerful shield for directors against monetary liability for breaches of the duty of care.
Indemnification Agreements
The Court of Chancery’s decision in Schoon highlighted the role of private indemnification agreements, and in Levy v. HLI Operating Co., the Court of Chancery focused both on the extent to which Section 145(f) of the DGCL may be relied upon in expanding the scope of indemnification and advancement beyond what is expressly set forth in the DGCL and on indemnification in the context of private equity fund designees serving on the board of a portfolio company.
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Our article summarizes these developments within the context of the relevant corporate governing documents in order to aid in the review of such documents. We do not intend to conduct an exhaustive analysis on any particular topic or case, but rather to raise awareness of certain interpretive guidelines found within these opinions. Delaware law continues to provide much leeway for private ordering, and awareness of interpretive case law is important in ensuring that a corporation’s governing documents are drafted carefully, have the intended effects and reflect the needs and desires of the corporation.
The article is available here.
(The article is reproduced with permission from Securities Regulation & Law Report, 41 SRLR 921 (May 18, 2009). Copyright 2009 by The Bureau of National Affairs, Inc. (800-372-1033) http://www.bna.com.)
