McBride Law Blog

Delaware Law Update: Director Indemnification and Advancement of Legal Expenses (Part II)

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In Narayanan v. Sutherland Global Holdings, Inc.,[1] there were three documents that were relevant to Narayanan’s rights to indemnification and advancement of expenses.  First, the company’s certificate of incorporation authorized indemnification and advancement through bylaw provisions, agreements, or otherwise, “in excess of the indemnification and advancement otherwise permitted by [Delaware law].”  Second, the company’s bylaws did provide such indemnification and advancement of expenses, so long as Narayanan’s involvement in such proceedings arose out of his service as a director or officer.  The bylaws also explicitly provided that such rights are not exclusive of any other indemnification rights conferred elsewhere.  Third, Narayanan had a separate indemnification agreement with the company, which provided similarly expansive indemnification and advancement of expenses.  Like the company’s bylaws, the indemnification agreement provided that Narayanan’s rights were non-exclusive of any other indemnification rights he may have.  Unlike the certificate of incorporation or the bylaws, however, it required notice in writing and reasonable cooperation by Narayanan as conditions precedent to indemnification and advancement.

When Narayanan became involved in legal proceedings, he sought to avail himself to his advancement rights by mailing the required notice.  When the company failed to comply, Narayanan filed a complaint in Delaware, the company’s state of incorporation, seeking advancement of fees.  The company argued that Narayanan was not entitled to advancement because he failed to cooperate adequately as required.  The company argued that, because the parties entered into the agreements contemporaneously and, thus, intended the bylaws and the indemnification agreement to be read together, the court should enforce the cooperation provision under the indemnification agreement as a condition precedent to Narayanan’s right to receive advancement under either source.  The court disagreed.  The court said that the bylaws and the indemnification agreement clearly provide that those instruments are not exclusive of any other source of rights, which manifests the parties’ express intent for each instrument to exist separately and independently of each other.  The court said that, had the parties intended the instruments to operate conjunctively (i.e., together), they only needed to replace the non-exclusivity provisions with language to that effect.  Accordingly, the court held that the bylaws do not incorporate the cooperation requirement under the indemnification agreement and, thus, Narayanan was entitled to advancement under the bylaws regardless of his cooperation.

Narayanan v. Sutherland Global Holdings, Inc. shows that a party negotiating the terms of indemnification and advancement rights under Delaware law must take care to consider any other source of such rights (e.g., certificate of incorporation, bylaws, vote of shareholders or disinterested directors, etc.) and clearly express their intent regarding whether those instruments should operate together or separately.  Absent such expression of intent, Delaware courts will likely provide the broadest indemnification and advancement rights available.

This post was part of a multi-part series on indemnification and advancement of legal expenses for officers and directors under Delaware law.  You can find the other post by searching our blogs at www.mcbrideattorneys.com.  If you have any questions about the content of this blog or other business law issues not discussed here, please contact us.

If you have any suggestions for blog topics, please send them to info@mcbrideattorneys.com.

This posting is intended to be a planning tool to familiarize readers with some of the high-level issues discussed herein.  This is not meant to be a comprehensive discussion and additional details should be discussed with your transaction planners including attorneys, accountants, consultants, bankers and other business planners who can provide advice for your circumstances.  This article should not be treated as legal advice to any person or entity.

Steps have been taken to verify the contents of this article prior to publication.  However, readers should not, and may not, rely on this article.  Please consult with counsel to verify all contents and do not rely solely on this article in planning your legal transactions.

About the Author

So-Eun Lee – So-Eun Lee is an associate attorney in the New York office of The R. Shawn McBride Law Firm, PLLC.  She concentrates her practice on business law.  So-Eun can be contacted at soeun.lee@mcbrideattorneys.com.  Her profile is available on www.mcbrideattorneys.com.

[1] Narayanan v. Sutherland Global Holdings, Inc., C.A. No. 11757-VCMR (Del. Ct. Chan. July 5, 2016).  Unless otherwise stated, all references to the case are to this citation.

Facebooktwittergoogle_pluslinkedinmailAbout the Author Shawn works successful, private business owners in their growth and missions to make a company that stands the test of time. You can email or call (214) 418-0258.

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