Donald L. Blankenship v. Alpha Appalachia Holdings, Inc.
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Opinion
IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
DONALD L. BLANKENSHIP, ) ) Plaintiff, ) ) v. ) C.A. No. 10610-CB ) ALPHA APPALACHIA HOLDINGS, INC., f/k/a ) MASSEY ENERGY COMPANY, a Delaware ) corporation, and ALPHA NATURAL ) RESOURCES, INC., a Delaware corporation, ) ) Defendants. )
MEMORANDUM OPINION
Date Submitted: May 14, 2015 Date Decided: May 28, 2015
Daniel B. Rath, K. Tyler O’Connell and Travis J. Ferguson of LANDIS RATH & COBB LLP, Wilmington, Delaware; Graeme W. Bush and Andrew N. Goldfarb of ZUCKERMAN SPAEDER LLP, Washington, D.C.; Attorneys for Plaintiff.
Donald J. Wolfe, Jr., Matthew E. Fischer and Jacqueline A. Rogers of POTTER ANDERSON & CORROON LLP, Wilmington, Delaware; Mitchell A. Lowenthal, Lev L. Dassin, Victor L. Hou and Marla A. Decker of CLEARY GOTTLIEB STEEN & HAMILTON LLP, New York, New York; William S. Ohlemeyer of BOIES, SCHILLER & FLEXNER LLP, Armonk, New York; Attorneys for Defendants.
BOUCHARD, C. I. INTRODUCTION
This advancement action involves some unusual facts but an all too common
scenario: the termination of mandatory advancement to a former director and officer
when trial is approaching and it is needed most.
Plaintiff Donald L. Blankenship is the former Chief Executive Officer and
Chairman of Massey Energy Company, which is now known as Alpha Appalachia
Holdings, Inc. (“Massey”). Blankenship held those positions when there was a tragic
explosion at a Massey subsidiary’s coal mine in West Virginia in April 2010, killing 29
miners. In June 2011, after Blankenship had retired from Massey, Alpha Natural
Resources, Inc. (“Alpha”) acquired Massey. For several years after the explosion,
Massey and Alpha (together, the “Defendants”) honored Blankenship’s rights to
advancement and paid his legal expenses relating to various civil proceedings and a
federal criminal investigation that had been launched as a result of the explosion.
On November 13, 2014, the United States Attorney for the Southern District of
West Virginia obtained a four-count criminal indictment against Blankenship.
Blankenship is presently scheduled to go to trial on July 13, 2015.
In the wake of the indictment, Alpha stopped paying Blankenship’s legal fees.
Alpha management, with approval from Alpha’s board of directors, then initiated a
process to review the company’s indemnification and advancement obligations to
Blankenship. Alpha focused on an unusual undertaking Blankenship had signed in April
2011 (the “Undertaking”), which states, in relevant part, that Massey’s indemnification
and advancement obligations to Blankenship are “contingent upon [certain] factual
1 representations and undertakings,” including a representation that, in performing his
duties as a director and officer of Massey, Blankenship “had no reasonable cause to
believe that [his] conduct was ever unlawful.” In late January 2015, after a process
described below, Philip Cavatoni, an Alpha officer and Massey director, determined that
Blankenship had breached that representation (the “Determination”). Based on the
Determination, Alpha asserts that Blankenship is no longer entitled to advancement of
any of his legal expenses from Massey.
On February 5, 2015, Blankenship filed this action seeking advancement of his
unpaid legal expenses under, among other sources, the terms of Massey’s October 2010
Amended and Restated Certificate of Incorporation (the “Charter”) and an Agreement
and Plan of Merger between Massey and Alpha (the “Merger Agreement”). Most of
these unpaid legal expenses were incurred in connection with the criminal proceeding to
which Blankenship was made a party in November 2014 as a result of the indictment.
In this post-trial opinion, I conclude that the Undertaking cannot reasonably be
interpreted in the manner advocated by Defendants and that the Determination thus did
not provide a valid basis for Defendants to terminate Blankenship’s advancement rights
under Massey’s Charter. I also conclude that Blankenship is entitled to advancement
from Alpha as well as Massey for the legal expenses he has incurred in connection with
the criminal proceeding under the unambiguous terms of the Merger Agreement.
2 II. BACKGROUND
These are the facts as I find them based on the documentary evidence and
testimony of record. 1
A. The Parties
Plaintiff Donald L. Blankenship is the former Chief Executive Officer and
Chairman of the board of directors of Massey Energy Company.
Defendant Alpha Appalachia Holdings, Inc., formerly known as Massey Energy
Company, is a Delaware corporation engaged in the coal mining business. Massey is
currently a wholly owned subsidiary of Alpha Natural Resources, Inc.
Defendant Alpha Natural Resources, Inc., a Delaware corporation based in
Linthicum Heights, Maryland, also is in the coal mining business.
B. The Explosion at Massey’s Upper Big Branch Mine
In April 2010, an explosion occurred at the Upper Big Branch (“UBB”) mine
operated by Performance Coal Company (“Performance”), a Massey subsidiary, killing
29 miners. Shortly after the UBB explosion, the United States Attorney’s Office for the
Southern District of West Virginia (the “U.S. Attorney”) commenced an investigation
into the underlying facts and circumstances of the explosion. 2
1 By stipulation, deposition testimony is part of the trial record. Pre-Trial Stip. and Order (“Pre-Trial Stip.”) ¶ 6(4). 2 Id. ¶ 2(19).
3 C. Blankenship Engages Zuckerman Spaeder LLP
In June 2010, William W. Taylor, III, a partner at the law firm of Zuckerman
Spaeder LLP (“Zuckerman Spaeder”), sent a letter to Blankenship (the “Engagement
Letter”) to confirm the terms and conditions under which Zuckerman Spaeder would
“represent [him] in connection with investigations resulting from the Upper Big Branch
mine explosion, and related matters if requested to undertake them.” 3 According to
Taylor, the Engagement Letter is part of Zuckerman Spaeder’s standard practice with
clients, “particularly when there will be third-party defendant payment by a company or
some other third-party defendant for an individual client.” 4
The Engagement Letter sets forth Massey’s commitment to pay Blankenship’s
legal fees on a timely basis, as follows:
Massey Energy Company agrees to pay all fees and expenses incurred within thirty days of the date of any invoice. Any outstanding balances that are not paid when due will accrue a service charge at the rate of twelve (12) percent per annum (one percent (1%) per month) from the due date until paid, in order to offset the costs of carrying any overdue amount. 5
The Engagement Letter does not refer to Blankenship’s indemnification rights under
Massey’s Charter or to the need for an undertaking to obtain advancement of his legal
fees.
3 JX 21 (Engagement Letter) at DBDEL0009. 4 Trial Tr. (“Tr.”) 12 (Taylor). 5 JX 21 (Engagement Letter) at DBDEL0010.
4 Blankenship and Shane Harvey, then-General Counsel of Massey, both signed the
Engagement Letter as “SEEN and AGREED.” 6 Before executing the document,
Blankenship asked Harvey if it was “OK” to sign it. 7 Blankenship put no pressure on
Harvey to decide whether the Engagement Letter was acceptable. 8
Taylor testified that the Engagement Letter reflects Massey’s unconditional
promise to pay Blankenship’s legal fees. 9 Blankenship, by contrast, acknowledged that
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IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
DONALD L. BLANKENSHIP, ) ) Plaintiff, ) ) v. ) C.A. No. 10610-CB ) ALPHA APPALACHIA HOLDINGS, INC., f/k/a ) MASSEY ENERGY COMPANY, a Delaware ) corporation, and ALPHA NATURAL ) RESOURCES, INC., a Delaware corporation, ) ) Defendants. )
MEMORANDUM OPINION
Date Submitted: May 14, 2015 Date Decided: May 28, 2015
Daniel B. Rath, K. Tyler O’Connell and Travis J. Ferguson of LANDIS RATH & COBB LLP, Wilmington, Delaware; Graeme W. Bush and Andrew N. Goldfarb of ZUCKERMAN SPAEDER LLP, Washington, D.C.; Attorneys for Plaintiff.
Donald J. Wolfe, Jr., Matthew E. Fischer and Jacqueline A. Rogers of POTTER ANDERSON & CORROON LLP, Wilmington, Delaware; Mitchell A. Lowenthal, Lev L. Dassin, Victor L. Hou and Marla A. Decker of CLEARY GOTTLIEB STEEN & HAMILTON LLP, New York, New York; William S. Ohlemeyer of BOIES, SCHILLER & FLEXNER LLP, Armonk, New York; Attorneys for Defendants.
BOUCHARD, C. I. INTRODUCTION
This advancement action involves some unusual facts but an all too common
scenario: the termination of mandatory advancement to a former director and officer
when trial is approaching and it is needed most.
Plaintiff Donald L. Blankenship is the former Chief Executive Officer and
Chairman of Massey Energy Company, which is now known as Alpha Appalachia
Holdings, Inc. (“Massey”). Blankenship held those positions when there was a tragic
explosion at a Massey subsidiary’s coal mine in West Virginia in April 2010, killing 29
miners. In June 2011, after Blankenship had retired from Massey, Alpha Natural
Resources, Inc. (“Alpha”) acquired Massey. For several years after the explosion,
Massey and Alpha (together, the “Defendants”) honored Blankenship’s rights to
advancement and paid his legal expenses relating to various civil proceedings and a
federal criminal investigation that had been launched as a result of the explosion.
On November 13, 2014, the United States Attorney for the Southern District of
West Virginia obtained a four-count criminal indictment against Blankenship.
Blankenship is presently scheduled to go to trial on July 13, 2015.
In the wake of the indictment, Alpha stopped paying Blankenship’s legal fees.
Alpha management, with approval from Alpha’s board of directors, then initiated a
process to review the company’s indemnification and advancement obligations to
Blankenship. Alpha focused on an unusual undertaking Blankenship had signed in April
2011 (the “Undertaking”), which states, in relevant part, that Massey’s indemnification
and advancement obligations to Blankenship are “contingent upon [certain] factual
1 representations and undertakings,” including a representation that, in performing his
duties as a director and officer of Massey, Blankenship “had no reasonable cause to
believe that [his] conduct was ever unlawful.” In late January 2015, after a process
described below, Philip Cavatoni, an Alpha officer and Massey director, determined that
Blankenship had breached that representation (the “Determination”). Based on the
Determination, Alpha asserts that Blankenship is no longer entitled to advancement of
any of his legal expenses from Massey.
On February 5, 2015, Blankenship filed this action seeking advancement of his
unpaid legal expenses under, among other sources, the terms of Massey’s October 2010
Amended and Restated Certificate of Incorporation (the “Charter”) and an Agreement
and Plan of Merger between Massey and Alpha (the “Merger Agreement”). Most of
these unpaid legal expenses were incurred in connection with the criminal proceeding to
which Blankenship was made a party in November 2014 as a result of the indictment.
In this post-trial opinion, I conclude that the Undertaking cannot reasonably be
interpreted in the manner advocated by Defendants and that the Determination thus did
not provide a valid basis for Defendants to terminate Blankenship’s advancement rights
under Massey’s Charter. I also conclude that Blankenship is entitled to advancement
from Alpha as well as Massey for the legal expenses he has incurred in connection with
the criminal proceeding under the unambiguous terms of the Merger Agreement.
2 II. BACKGROUND
These are the facts as I find them based on the documentary evidence and
testimony of record. 1
A. The Parties
Plaintiff Donald L. Blankenship is the former Chief Executive Officer and
Chairman of the board of directors of Massey Energy Company.
Defendant Alpha Appalachia Holdings, Inc., formerly known as Massey Energy
Company, is a Delaware corporation engaged in the coal mining business. Massey is
currently a wholly owned subsidiary of Alpha Natural Resources, Inc.
Defendant Alpha Natural Resources, Inc., a Delaware corporation based in
Linthicum Heights, Maryland, also is in the coal mining business.
B. The Explosion at Massey’s Upper Big Branch Mine
In April 2010, an explosion occurred at the Upper Big Branch (“UBB”) mine
operated by Performance Coal Company (“Performance”), a Massey subsidiary, killing
29 miners. Shortly after the UBB explosion, the United States Attorney’s Office for the
Southern District of West Virginia (the “U.S. Attorney”) commenced an investigation
into the underlying facts and circumstances of the explosion. 2
1 By stipulation, deposition testimony is part of the trial record. Pre-Trial Stip. and Order (“Pre-Trial Stip.”) ¶ 6(4). 2 Id. ¶ 2(19).
3 C. Blankenship Engages Zuckerman Spaeder LLP
In June 2010, William W. Taylor, III, a partner at the law firm of Zuckerman
Spaeder LLP (“Zuckerman Spaeder”), sent a letter to Blankenship (the “Engagement
Letter”) to confirm the terms and conditions under which Zuckerman Spaeder would
“represent [him] in connection with investigations resulting from the Upper Big Branch
mine explosion, and related matters if requested to undertake them.” 3 According to
Taylor, the Engagement Letter is part of Zuckerman Spaeder’s standard practice with
clients, “particularly when there will be third-party defendant payment by a company or
some other third-party defendant for an individual client.” 4
The Engagement Letter sets forth Massey’s commitment to pay Blankenship’s
legal fees on a timely basis, as follows:
Massey Energy Company agrees to pay all fees and expenses incurred within thirty days of the date of any invoice. Any outstanding balances that are not paid when due will accrue a service charge at the rate of twelve (12) percent per annum (one percent (1%) per month) from the due date until paid, in order to offset the costs of carrying any overdue amount. 5
The Engagement Letter does not refer to Blankenship’s indemnification rights under
Massey’s Charter or to the need for an undertaking to obtain advancement of his legal
fees.
3 JX 21 (Engagement Letter) at DBDEL0009. 4 Trial Tr. (“Tr.”) 12 (Taylor). 5 JX 21 (Engagement Letter) at DBDEL0010.
4 Blankenship and Shane Harvey, then-General Counsel of Massey, both signed the
Engagement Letter as “SEEN and AGREED.” 6 Before executing the document,
Blankenship asked Harvey if it was “OK” to sign it. 7 Blankenship put no pressure on
Harvey to decide whether the Engagement Letter was acceptable. 8
Taylor testified that the Engagement Letter reflects Massey’s unconditional
promise to pay Blankenship’s legal fees. 9 Blankenship, by contrast, acknowledged that
he did not think that the Engagement Letter “enhanced” his advancement rights. 10
D. Blankenship Retires from Massey
On December 3, 2010, Blankenship entered into a Retirement Agreement with
Massey by which he would retire as CEO and Chairman effective December 31, 2010.11
The retirement was “not entirely voluntary.” 12 Paragraph 12 of the Retirement
Agreement, entitled “Indemnity Obligations,” sets forth Massey’s agreement to maintain
its then-existing indemnification and advancement obligations to Blankenship:
The Company [i.e., Massey] agrees to maintain and adhere to all its obligations to indemnify you and advance your legal fees in accordance with the terms and conditions set forth in the Company’s Certificate of
6 Id. at DBDEL0011. 7 JX 20B (Email from Don L. Blankenship to Shane Harvey (June 3, 2010)). 8 Tr. 67 (Blankenship). 9 Id. 28, 59 (Taylor). 10 Id. 77-78 (Blankenship); Blankenship Dep. 48-49. 11 JX 25 (Retirement Agreement). 12 Tr. 23 (Taylor).
5 Incorporation and any written indemnity agreements existing and in force as of your Retirement Date, or as otherwise imposed by law, for so long as those agreements or legal obligations require. 13
Taylor, who represented Blankenship in connection with his retirement from Massey and
negotiated the Retirement Agreement, testified that the language in Paragraph 12 likely
was in the draft when he received it and was not controversial. He also believed the
phrase “written indemnity agreements” referred to the Engagement Letter. 14 Admiral
Bobby R. Inman, Massey’s lead independent director at the time, executed the
Retirement Agreement on behalf of Massey. 15
E. Massey Enters Into a Merger Agreement with Alpha
In approximately May 2010, after the UBB explosion, Alpha began to explore a
potential acquisition of Massey. Alpha retained Cleary Gottlieb Steen & Hamilton LLP
(“Cleary Gottlieb”) as its legal advisor in connection with that transaction. Cleary
Gottlieb remained Alpha’s outside counsel throughout that process and in connection
with the events that gave rise to this action.
On January 28, 2011, Massey and Alpha entered into the Merger Agreement, 16
under which Alpha would acquire Massey in a cash-and-stock transaction. Section 5.05
of the Merger Agreement sets forth the respective obligations of Massey and Alpha to the
13 JX 25 (Retirement Agreement) at ¶ 12. 14 Tr. 22-23 (Taylor). 15 JX 25 (Retirement Agreement) at DBDEL0035. 16 JX 26 (Merger Agreement).
6 defined “Indemnified Parties,” which include Blankenship as a former director and
officer of Massey.
The merger was the subject of a preliminary injunction application in In re Massey
Energy Co. Derivative and Class Action Litigation. 17 In brief, Massey stockholders
argued that the board did not obtain adequate value from Alpha for certain derivative
claims relating to the company’s mine safety policies and procedures. 18 As discussed
below, the Court considered Alpha’s indemnification obligations to Blankenship under
the Merger Agreement as part of its analysis. Ultimately, for reasons not relevant to this
action, then-Vice Chancellor Strine denied the preliminary injunction motion, and the
case remains pending before the Court.
On June 1, 2011, Alpha completed its acquisition of Massey, which is now a
wholly owned subsidiary of Alpha.
F. The Undertaking
On June 14, 2010, about six months before his retirement, Blankenship executed
an undertaking to obtain advancement from Massey of his legal expenses incurred in
17 2011 WL 2176479 (Del. Ch. May 31, 2011). 18 See id. at *9 (“In broad strokes, the Derivative Claims rest on allegations that certain current and former directors and officers of Massey breached their fiduciary duties during the period from May 21, 2008 to the present by (i) ‘chronically disregarding mining safety regulations and incurring nearly $27 million in assessed violations by the [MSHA], comprising a material portion of its net income in any given year; and (ii) consistently failing to adequately address poor safety conditions of its mines[.]’ ”).
7 connection with legal proceedings relating to Massey’s compliance with environmental
and safety regulations. 19 The June 2010 undertaking is not at issue in this action.
On March 29, 2011, after the Merger Agreement was signed but before the
transaction closed, Stephanie Ojeda, Senior Corporate Counsel of Massey, sent a new
proposed undertaking (as defined above, the “Undertaking”) to Taylor at Zuckerman
Spaeder. 20 In a cover letter, Ojeda explained that Massey remained committed to its
indemnification obligations to Blankenship (and other employees of Massey) and that the
enclosed Undertaking “clarifies” the relationship between Massey and Blankenship:
In light of the impending merger, I write to address the legal representation you are providing to employees of Massey and its affiliated entities in relation to ongoing government investigations of the April 5, 19 The June 2010 undertaking states, in relevant part:
By signing this letter, I agree to the following terms:
1. The advancement of legal expenses will be made under Article NINETEENTH of the Company’s [i.e., Massey’s] Certificate of Incorporation, which provides indemnification to its directors and officers to the fullest extent authorized by the Delaware General Corporation Law, and the Company may cease advancing legal expenses on my behalf at any time if the Company determines that I am not otherwise entitled to the advancement of legal expenses under such Article[.]
2. I will repay to the Company all legal expenses paid on my behalf if it is ultimately determined that I am not entitled to be indemnified by the Company for such expenses under the Certificate of Incorporation of the Company, the Delaware General Corporation Law, or any other law regulation.
JX 22 (Undertaking from Donald Blankenship to Massey Energy Company (June 14, 2010)). 20 JX 27 (Letter from Stephanie Ojeda to Bill Taylor (Mar. 29, 2011)). Ojeda testified she thought someone else drafted the cover letter, but she was not sure. Ojeda Dep. 39.
8 2010 accident at Upper Big Branch. The Company remains committed to providing appropriate assistance with the legal defense of its individual employees in connection with those investigations and, accordingly, will continue to do so after the merger with Alpha is finalized.
In the meantime, I ask that each represented individual sign the attached undertaking, which clarifies the relationship between Massey and your client(s) with respect to their legal representation in this matter and payment therefor. Please review the attached undertaking with your client(s) and return the signed form(s) to my attention.
I appreciate your service on behalf of Massey’s valued members. Please contact me at [redacted] if you have any questions regarding this letter or the attached undertaking. 21
Other than this cover letter, there are no written communications in the record concerning
the meaning of the Undertaking.
The provision at the end of the first paragraph of the Undertaking states that
Massey’s indemnification and advancement obligations are “contingent upon” three
enumerated “factual representations and undertakings.” I refer to that provision as the
“Contingency Provision.” The legal effect of the factual representation in the second
enumerated paragraph is a critical issue in this case. I refer to that representation as the
“Reasonable Cause Representation.” The last paragraph of the Undertaking states
explicitly that Massey shall not be obligated to advance further expenses to Blankenship
in two specified circumstances. I refer to that provision as the “Termination Provision.”
The entire text of the Undertaking is quoted below:
I, Donald L. Blankenship, have retained counsel to represent me in connection with a federal criminal grand jury investigation conducted by the Office of the United States Attorney for the Southern District of West
21 JX 27 at 1 (emphasis added).
9 Virginia and agents of the Federal Bureau of Investigation and Federal Mine Safety and Health Administration, as well as in connection with any concurrent or other proceedings relating to Performance Coal Company (“Performance”), Massey Energy Company (“Massey”), Massey Coal Services, Inc. (“MCS”), and any affiliates or certain officers, employees or other persons associated with these entities. It is my understanding that Massey will indemnify me and/or advance on my behalf the fees and costs associated with this representation, contingent upon the following factual representations and undertakings, which I hereby make and declare to be true [as defined above, the “Contingency Provision”]:
1. In the performance of my actions as an officer, director, employee, or consultant of Massey and/or any of its affiliates and subsidiaries, including but not limited to MCS, I acted in good faith and in a manner that I reasonably believed to be consistent with the best interests of Massey and its affiliates and subsidiaries;
2. In the performance of my actions as an officer, director, employee, and consultant of Massey and/or any of its affiliates and subsidiaries, including but not limited to MCS, I had no reasonable cause to believe that my conduct was ever unlawful [as defined above, the “Reasonable Cause Representation”]; and
3. If it shall ultimately be determined that I am not entitled to the indemnification described above and in any applicable Agreement for Indemnification, consistent with governing laws, I hereby agree to repay Massey any sums that Massey has expended on my behalf for indemnification or advancement.
I further understand that, in any event, Massey, Performance, and/or MCS shall not be obligated to indemnify me or advance further fees and costs on my behalf if: (i) I should enter a plea of guilty, or be found guilty by a court or jury, on any criminal charge related to my actions as an officer, director, employee, and consultant of Massey and/or any of its affiliates and subsidiaries, including but not limited to MCS, or otherwise relating to the subject matter of the above-described criminal investigation; or (ii) Massey, Performance, and/or MCS otherwise determines that I am not entitled to indemnification under governing laws [as defined above, the “Termination Provision”]. 22
22 JX 28 (Undertaking) at ANR_AAR-00000442-43 (emphasis added).
10 The Undertaking refers to two entities (Performance and MCS) in addition to Massey that
were not mentioned in the June 2010 undertaking. Before his retirement, Blankenship
held various positions at Performance and MCS, both of which are West Virginia
corporations. 23
Massey drafted the Undertaking. 24 Taylor, on behalf of Blankenship, did not have
any discussions with Ojeda or anyone else at Massey about the Undertaking, nor did he
suggest any changes to the document. 25 Ojeda, who did not appear at trial, testified in
deposition that she understood the Undertaking to be “just confirmation of a duty or
obligation with respect to indemnifying and advancing fees. The obligation had already
been established[.]” 26 When asked what she meant by “the obligation had already been
established,” Ojeda explained, “That the company [i.e., Massey] had already agreed to
indemnify and advance fees, and it [i.e., the Undertaking] was just a restatement of that,
after the announcement of the merger agreement.” 27
23 See, e.g., Defs.’ Ans. Br. Ex. B (Articles of Incorporation of Massey Coal Services, Inc.); Defs.’ Ans. Br. Ex. D (Articles of Incorporation of Performance Coal Company). Because Blankenship is not seeking relief from those entities, which are not parties to this litigation, I do not address their advancement obligations to him under West Virginia law. 24 Taylor Dep. 39-40. 25 Tr. 45, 49-50 (Taylor). 26 Ojeda Dep. 32. 27 Id. 33.
11 Taylor likely discussed the Undertaking with another partner at his firm, but he did
not “conduct an elaborate legal analysis” 28 even though he acknowledged at trial that the
Undertaking was unlike any he has seen in his four decades of practice. 29 Zuckerman
Spaeder’s billing records reflect that about one hour of attorney time in total was devoted
to reviewing the Undertaking. 30 Afterwards, Taylor offered advice to Blankenship about
it, most likely via a letter dated April 11, 2011. 31 Taylor testified that, although he could
not recall specifically what he thought at the time, he was “confident that [he] did not
believe that [the Undertaking] modified or changed Mr. Blankenship’s rights to
advancement in any respect” and that he “would not have acquiesced in [Blankenship’s]
signing it had [he] believed that.” 32
Blankenship was sure that he and Taylor would have communicated about the
Undertaking before he signed it, but he could not recall any specific conversations they
may have had. 33 Blankenship further testified that, when he received the Undertaking, no
one at Massey had ever informed him that he was in breach of the Retirement Agreement
28 Tr. 25, 61 (Taylor). 29 Id. 46 (Taylor). 30 Id. 62 (Taylor). 31 Id. 49-50 (Taylor); id. 89-90 (Blankenship); JX 52 (Pl.’s Privilege Log). Privilege was asserted with respect to any advice Taylor or Zuckerman Spaeder gave Blankenship concerning the Undertaking. Tr. 60-61; JX 52 (Pl.’s Privilege Log). 32 Tr. 25-26 (Taylor). 33 Id. 89-90 (Blankenship).
12 or that Massey wanted to modify any provision of the Retirement Agreement, 34 Section
12 of which (quoted above) required Massey to maintain its then-existing indemnification
and advancement obligations to Blankenship.
On April 12, 2011, Blankenship executed the Undertaking. By letter dated April
21, 2011, the executed Undertaking was sent to Massey. 35
G. Massey and Alpha Advance Blankenship’s Legal Fees
As it had before the merger, Zuckerman Spaeder continued to submit invoices for
its representation of Blankenship to Massey after the merger. In 2012, likely at the
request of someone at Massey, Zuckerman Spaeder began submitting invoices to Alpha. 36
When this change happened is not clear. Taylor did not pay attention to who paid the
invoices. As long as they were paid, it “didn’t matter” to him who paid them. 37
In its invoices, Zuckerman Spaeder listed the total expenses incurred as well as a
summary of the legal fees incurred by attorney, number of hours, and hourly rate without
any details as to the specific services rendered during the billing period. 38 This
arrangement was consistent with the Engagement Letter, which provides that invoices
34 Id. 72-73 (Blankenship). 35 JX 28 (Letter from William W. Taylor, III to Shane Harvey (Apr. 21, 2011)) at ANR_AAR-00000441. 36 JX 23 (Letter from William W. Taylor, III to Stephanie Ojeda of Massey (Aug. 31, 2010)); JX 34 (Letter from William W. Taylor, III to Vaughn Groves of Alpha (Mar. 1, 2012)). 37 Tr. 17, 20 (Taylor). 38 JX 57 at 2-15.
13 submitted to Massey would “not contain an itemization of . . . time and expenses but will
show a summary of hours and fees” to “avoid disclosure of privileged information and
possible waiver of the attorney client privilege.” 39
At times, upon a request by Alpha, Zuckerman Spaeder sent copies of invoices
containing time detail that were heavily redacted to “obliterate[] anything that was
substantive about the nature of our work.” 40 According to Taylor, the substantial
redactions complied with the Engagement Letter and were necessary because Alpha had
entered into a cooperation agreement with the United States Department of Justice. 41
Massey and/or Alpha paid Zuckerman Spaeder’s invoices until November 2014. 42
H. The Indictment and Criminal Proceeding
On November 13, 2014, a federal grand jury handed down the Indictment in the
United States District Court for the Southern District of West Virginia in a proceeding
captioned United States v. Blankenship, No. 5:14-cr-00244 (the “Criminal
Proceeding”). 43 The Indictment charged Blankenship with (i) conspiracy to willfully
violate mandatory mine safety and health standards; (ii) conspiracy to defraud the United
States by concealing mine safety violations; (iii) making false statements to the U.S.
39 JX 21 (Engagement Letter) at DBDEL0010. 40 Tr. 20 (Taylor). 41 Id. 19-20 (Taylor). 42 Pre-Trial Stip. ¶ (2)28. 43 JX 39 (Indictment).
14 Securities and Exchange Commission; and (iv) securities fraud by making false public
statements. 44 Defendants have stipulated that the Indictment charges Blankenship with
crimes by reason of the fact that he was an officer and director of Massey. 45
Blankenship retained Zuckerman Spaeder, his counsel during the U.S. Attorney’s
investigation, to conduct his defense in the Criminal Proceeding. Zuckerman Spaeder
retained counsel in West Virginia to assist in the representation. 46
I. Alpha Management Reviews Blankenship’s Advancement Rights
On November 19, 2014, on the second day of a two-day Alpha board meeting,
Clearly Gottlieb “apprised the Board of recent events pertaining to the pending criminal
investigation [of Blankenship] related to the Upper Big Branch explosion,” 47 which
included summarizing the Indictment and broadly discussing Blankenship’s advancement
rights. 48 Richard Verheij, Alpha’s General Counsel, attended Cleary Gottlieb’s
44 Id. at 34-43. On March 10, 2015, a three-count Superseding Indictment was filed charging Blankenship with (i) conspiracy to willfully violate mandatory mine safety and health standards; (ii) making false statements to the SEC; and (iii) securities fraud. JX 54 (Superseding Indictment) at 34-41. 45 Pre-Trial Stip. ¶ 2(2). 46 Id. ¶ 2(23). The unpaid invoices include fees and expenses Blankenship’s West Virginia counsel incurred in the Criminal Proceeding. JX 57 (Chart, Donald L. Blankenship – Outstanding Legal Expenses) at 1. 47 JX 40 (Alpha Natural Resources, Inc., Meeting of the Board of Directors (Nov. 18-19, 2014)) at ANR_AAR-00000632. 48 Pre-Trial Stip. ¶ 2(33).
15 presentation. Privilege has been asserted over the legal advice Cleary Gottlieb provided
to Alpha.
After this board meeting, Verheij, who had joined Alpha only a few months earlier
in August 2014, 49 “undertook to educate [him]self as to the nature of the company’s
obligation” to advance Blankenship’s legal fees. 50 Verheij worked with Cleary Gottlieb
to identify and review relevant documentation on this issue. 51 In connection with
investigating potential derivative claims against Blankenship and other individuals on
behalf of Alpha and representing Alpha in other proceedings arising out of the UBB
explosion, Cleary Gottlieb had reviewed millions of Massey’s internal documents and
hundreds of audiotapes secretly recorded by Blankenship. 52
Verheij’s self-appointed inquiry was “whether there was a factual basis to review
whether the company had a continuing obligation to advance fees to Mr. Blankenship.” 53
He focused on any and all documents and audiotapes—or, more accurately, excerpts from
documents and audiotapes—relevant to the factual representations in the Undertaking.
49 Id. ¶ 2(34). 50 Tr. 292 (Verheij). 51 Id. 292-93 (Verheij). 52 Id. 119-22 (Hou). There are approximately 1800 to 1900 audio recordings that Blankenship made from three recording devices installed in his office, which Alpha and Cleary Gottlieb learned about after the merger closed. Id. 53 Id. 294 (Verheij).
16 Many of the documents Verheij and Cleary Gottlieb reviewed were not produced in this
litigation on privilege grounds. 54
While Verheij was compiling a list of potentially probative statements that
Blankenship had made in writing or on tape, there were informal conversations among
senior Alpha management about initiating a more official process to evaluate the
Undertaking and the possibility of terminating Blankenship’s advancement rights. 55 As
one senior executive put it, “it was management’s decision to – to entertain, evaluate and
make whatever the appropriate decision was.” 56 According to Verheij, this is how Alpha
handled most litigation decisions. 57 Although it was within management’s purview to
make a decision on Blankenship’s advancement rights, senior management nevertheless
decided to consult the Massey Litigation Advisory Committee (the “MLAC”), a
committee of the Alpha board established to advise the board with respect to legacy
Massey litigation matters, 58 and the full board. 59
On December 11, 2014, Verheij sent to Kevin Crutchfield, Alpha’s Chief
Executive Officer and Chairman, a memorandum entitled “Advancement of Blankenship
54 Id. 143-44 (Hou). 55 Id. 228-29 (Cavatoni). 56 Id. 230 (Cavatoni). 57 Id. 301-02 (Verheij). 58 JX 42 at ANR_AAR-00001541; Tr. 299 (Verheij). 59 Tr. 231 (Cavatoni).
17 Attorney Fees and Related Expenses” (the “Verheij Memo”). 60 Consistent with Alpha’s
approach throughout this litigation, the legal advice included in the Verheij Memo
relating to Blankenship’s advancement rights was withheld on privilege grounds. To wit,
seven of the twelve pages of the Verhiej Memo are entirely redacted except for a handful
of headings, such as “Arguments with Respect to Advancement Obligation” and
“Advantages and Disadvantages for Refusing to Make Further Advances.” 61 Only the
factual background section is not redacted.
The Verheij Memo contains an “illustrative” list of excerpted written and recorded
statements by Blankenship 62 that, in Verheij’s view, “appeared to be inconsistent with
Mr. Blankenship’s representation that he had no reasonable cause to believe that his
conduct was ever unlawful.” 63 Verheij selected these excerpts, which are dated from
2008 to 2010, based on materials Cleary Gottlieb provided to him when he joined
Alpha. 64 The fact that Blankenship made these statements was important to Verheij
because he thought a “reasonable person could characterize them as admissions.” 65
60 JX 41 (Verheij Memo). 61 Id. at ANR_AAR-00001528-29, 33-37. 62 Id. at ANR_AAR-00001530-31. 63 Tr. 294 (Verheij). Victor Hou of Cleary Gottlieb described these excerpts as “really by definition meant to be reminders to the MLAC of things that they had already seen or heard about and were not intended to be exhaustive.” Id. 142 (Hou). 64 Pre-Trial Stip. ¶ 2(35). Much of those materials were not produced in this litigation on privilege grounds. 65 Verheij Dep. 79.
18 Verheij did not review the entirety of the underlying documents or the audiotapes from
which the excerpts were taken. 66 Also listed in the Verheij Memo are excerpts from a
June 2009 memorandum on Massey’s compliance culture prepared by Bill Ross, a former
federal regulator hired by Massey to work on mine safety issues. 67
On December 13, 2014, two days after the Verheij Memo, Cleary Gottlieb
provided a memorandum (the “Cleary Memo”) to the MLAC that
summarizes the relevant work performed to date by the [MLAC] to help the Committee evaluate the issue of whether Don Blankenship is entitled to further advancement of legal fees under the governing law and his contractual undertakings about such advancement following Mr. Blankenship’s recent indictment by a grand jury in the Southern District of West Virginia. 68
The Cleary Memo contains three sections: (i) a description and summary of several
formal investigations into the UBB explosion, including the U.S. Attorney’s investigation
and the resulting Indictment; (ii) a summary of the MLAC’s investigation into potential
derivative claims; and (iii) a section entitled “Indemnification and Advancement of
Attorneys’ Fees.” Everything included under this third section, which spanned roughly
two pages, was withheld on privilege grounds. 69
Appended to the Cleary Memo as “Appendix A” are the same excerpts of written
statements, audiotape transcriptions, and the June 2009 Bill Ross memorandum that
66 Tr. 311 (Verheij). 67 JX 41 (Verheij Memo) at ANR_AAR-00001530-31; Tr. 150-51 (Hou). 68 JX 42 (Cleary Memo) at ANR_AAR-00001538. 69 Id. at ANR_AAR-00001543-45.
19 Verheij included in the earlier Verheij Memo. 70 The introduction to Appendix A states
that the listed excerpts, though “not intended to be exhaustive of all relevant materials,”
are “certain evidence that may bear on Mr. Blankenship’s representations in his April
2011 Undertaking that in the performance of his actions as an officer and director of
Massey he . . . had no reasonable cause to believe his conduct was ever unlawful.” 71
On December 22, 2014, the MLAC held a telephonic meeting during which Cleary
Gottlieb reviewed the Cleary Memo. 72 Verheij was on the line for this meeting. The
MLAC was made aware that Alpha had not paid any of Blankenship’s legal fees since the
Indictment. After a discussion, the MLAC members
indicated their support of management’s determination that Mr. Blankenship is not entitled to indemnification under governing laws and management’s proposal not to advance any further legal fees and expenses on Mr. Blankenship’s behalf and . . . recommended that the matter also be discussed with the Board. 73
At this point, Massey management had made no final determination to stop advancing
Blankenship’s legal fees. 74
70 Id. at ANR_AAR-00001546-49. 71 Id. at ANR_AAR-00001546. 72 JX 43 (Alpha Natural Resources, Inc., Telephonic Meeting of the Massey Litigation Advisory Committee of the Board of Directors (Dec. 22, 2014)) at ANR_AAR- 00001520-21. 73 Id. at ANR_ARR-00001521. 74 Pre-Trial Stip. ¶ 2(37).
20 J. The Determination to Stop Advancing Blankenship’s Legal Fees
On January 12, 2015, during a telephonic meeting of the full Alpha board, Cleary
Gottlieb made another presentation concerning Blankenship’s advancement rights.
Privilege again was asserted over the minutes that reflect Cleary Gottlieb’s legal advice
on this subject. Based on the minutes that were produced, the Alpha board, like the
MLAC, was supportive of management’s approach in evaluating the Undertaking. 75
Several members of Alpha senior management were on the line for this meeting,
including Verheij and Philip Cavatoni, an Executive Vice President of Alpha and its
Chief Strategy Officer and Treasurer.
After this meeting, Crutchfield and Verheij agreed to designate Cavatoni to make
a “determination” as to whether Massey should cease advancing Blankenship’s legal
expenses. Cavatoni was chosen in part because he held officer positions at each of the
three companies (Massey, Performance and MCS) to which the Undertaking applied. 76
According to Defendants, he also was chosen because he had a working knowledge of
mine safety regulations by participating in various Alpha committee meetings on
sustainability and he was generally familiar with the facts and circumstances surrounding
the UBB mine explosion and the “unique” amount of litigation it caused through his
75 JX 44 (Alpha Natural Resources, Inc., Telephonic Meeting of the Board of Directors (Jan. 12, 2015)) at ANR_AAR-00001523; Tr. 235 (Cavatoni). 76 Pre-Trial Stip. ¶ 2(39).
21 involvement in managing Alpha’s pre-merger diligence and post-merger integration of
Massey. 77
Verheij informed Cavatoni of his new responsibility. 78 There is no evidence that
anyone explicitly told Cavatoni to determine to stop advancing Blankenship’s legal fees.
Cavatoni testified that he was open to the possibility of concluding that Blankenship
should continue receiving advancement. 79
Cavatoni considered the merits of this task largely over a weekend. 80 The only
document he had in hand to review was the Cleary Memo and the attached Appendix A. 81
He reviewed the Cleary Memo and Appendix A in a “holistic manner” without relying on
“any one particular” excerpt. 82 He specifically considered the legal advice provided in
77 Tr. 201-04, 213-15 (Cavatoni); Verheij Dep. 42-46. Cavatoni also had previously attended one MLAC meeting, but not the meeting of December 22, 2014, during which Cleary Gottlieb reviewed the Cleary Memo. Tr. 218 (Cavatoni); JX 43. 78 Tr. 236 (Cavatoni). 79 Id. 205-06 (Cavatoni); Cavatoni Dep. 25-26. 80 Tr. 236 (Cavatoni). 81 Id. 249 (Cavatoni). Cavatoni did not have the Undertaking in his possession, but he had previously reviewed it. Id. 250 (Cavatoni). Cavatoni was not familiar with the specifics of the Indictment. Cavatoni Dep. 68, 70, 86. 82 Tr. 246 (Cavatoni); id. 260 (Cavatoni) (“When I evaluated these statements, I did it in a holistic manner in the context of the broader question. The focus wasn’t a statement-by- statement analysis to try to make my determination. It was part of an evaluation. The statements are important, but each individual statement of itself, I didn’t study it by itself and use it by itself to make the determination.”); Cavatoni Dep. 55-56 (“[T]here’s evidence that I reviewed, particularly with regard to safety, ventilation, roof bolting and other things where, as well as disclosure issues, where it was, in my judgment, it was evident that there was unlawful, what was going on was unlawful and that’s, a lot of
22 the Cleary Memo under the heading “Indemnification and Advancement of Attorneys’
Fees,” which has been withheld on privilege grounds. 83 The Appendix A excerpts were
the focus of Cavatoni’s attention because they “represented . . . Mr. Blankenship’s
words.” 84 The following examples are representative of the excerpts in Appendix A:
• “We have reached the point in Massey where no [one] has an Outlook that supports the number[s] that are given to the Board every quarter. To me, this is an extremely dangerous violation of Sarbanes Oxley in achieving control of the assets and making consensus.” (Memo 8/28/2009).
• “We seem to be unable to record a single customer price properly in our outlooks and our budgets. This raises grave concerns about control of our revenue and violations of Sarbanes Oxley.” (Memo 10/5/2009).
• “UBB could be a lot better than it is . . . . All of you engineers think that planning for ventilation in the year 2015 is more important than survival of today, and believe me it’s not. You need to get low on UBB and run some coal. We’ll worry about ventilation or other issues at an appropriate time. Now is not the time.” (Memo 4/3/2009). 85
that’s based on what was in Appendix A or those references in Appendix A. . . . [W]hen you evaluate these things and in my position I have a very good understanding of what is permitted and what isn’t permitted with respect to some of these safety issues and disclosure issues. And when I reviewed this information it was clear to me that what was going on and referenced here was not in compliance with what it needed to be in terms of the rules and regulations.”). 83 Tr. 257-58 (Cavatoni). 84 Id. 276, 249-50 (Cavatoni); Cavatoni Dep 53-54. He found the June 2009 Bill Ross memorandum excerpts to be “confirmatory” of the excerpts of Blankenship’s statements. Tr. 247 (Cavatoni). 85 JX 42 (Cleary Memo) at ANR_AAR-00001546-47.
23 Cavatoni did not review any of the documents or audiotapes from which the excerpts
were taken, 86 nor did he did ask anyone else at Alpha or Cleary Gottlieb for additional
information about the broader context of the excerpts. 87 Nonetheless, Cavatoni felt that
he had been provided with sufficient information to reach an informed result. 88
On January 29, 2015, Cavatoni had a half-hour phone call with Verheij and Victor
Hou, a partner at Cleary Gottlieb. During the call, Cavatoni was given the opportunity to
ask for additional information, but he did not do so. Hou read aloud one additional
excerpt from an audiotape transcription of a January 19, 2010, phone call Blankenship
had recorded. 89 The transcript Hou read from on January 29 appears to have been
materially inaccurate. 90
On January 29, after the phone call with Verheij and Hou, Cavatoni made the
Determination that the Reasonable Cause Representation in the Undertaking was false.
Specifically, Cavatoni determined “[t]hat Mr. Blankenship had reasonable cause to
believe his conduct was unlawful and that [Massey] had the ability to cease advance
86 Tr. 258, 263 (Cavatoni). 87 Id. 303 (Verheij); Cavatoni Dep. 84. 88 Tr. 205 (Cavatoni). 89 Id. 236 (Cavatoni). 90 The potentially problematic phrase “rewrite them” appears to have been improperly transcribed and should have stated “re-rock dust,” which would have made the excerpt innocuous. Id. 155-56 (Hou); JX 18A (audio recording); see generally Pl.’s Pre-Trial Ans. Br. 32-34.
24 payments [of his legal expenses].” 91 In reaching this conclusion, Cavatoni did not
identify any specific law or regulation that he concluded Blankenship had reasonable
cause to believe that he (Blankenship) had violated. 92 Nor did Cavatoni believe that any
such unlawful conduct needed to be based on or related to the allegations of the
Indictment. 93 When I asked Cavatoni at trial to elaborate on the basis for his
Determination, he conceded he could not identify any specific examples of unlawful
conduct by Blankenship and spoke in vague generalities. 94
In memoranda dated January 29, 2015, Cavatoni documented the Determination
for each of the three entities mentioned in the Undertaking. Those memoranda state in
identical language, except for the name of the entity, that:
Based on a review of the available information and consultation with the counsel and the Board of [Massey], and consultation with the Board and MLAC of its ultimate parent, [Massey] has (a) determined that Don Blankenship had reasonable cause to believe that his conduct was unlawful and (b) accordingly, determined that based on the April 12, 2011 undertaking executed by Mr. Blankenship, advances to him of amounts for fees and expenses in respect of the criminal indictment against him should cease and he should repay all prior advances in respect of the criminal matter. 95
Cavatoni did not make any determination on behalf of Alpha. 96
91 Tr. 202 (Cavatoni). 92 Id. 274, 282 (Cavatoni). 93 Id. 259 (Cavatoni). 94 Id. 280-82 (Cavatoni). 95 JX 45 (Memoranda from Philip J. Cavatoni to File (Jan. 29, 2015)). 96 Pre-Trial Stip. ¶ 2(46).
25 On or about January 29, 2015, Cleary Gottlieb orally informed Zuckerman
Spaeder that Massey was considering whether to terminate advancement of
Blankenship’s legal fees for the Criminal Proceeding. 97 Taylor sought to meet with the
decision-maker before the decision was final, but he was not permitted to do so. 98 On
February 2, 2015, Cleary Gottlieb emailed Zuckerman Spaeder to state that Massey
would not advance Blankenship’s defense costs incurred in connection with the Criminal
Proceeding. 99
Since the Determination, Zuckerman Spaeder has continued to submit invoices to
Alpha to pay Blankenship’s defense costs. No such invoices have been paid. 100
K. Blankenship Demands that Alpha Advance His Legal Fees
On February 18, 2015, after Blankenship initiated this action, his counsel at
Zuckerman Spaeder sent a demand letter to Cleary Gottlieb requesting that Alpha
advance Blankenship’s defense costs incurred in connection with the Criminal
Proceeding under Section 5.05(b) of the Merger Agreement. 101 A form of undertaking
97 Id. ¶ 2(43). 98 Tr. 32 (Taylor). Cavatoni was unaware of this request. Id. 253-54 (Cavatoni). 99 Pre-Trial Stip. ¶ 2(44). 100 Id. ¶ 2(29). 101 JX 47 (Letter from Graeme W. Bush of Zuckerman Spaeder to Victor Hou of Cleary Gottlieb (Feb. 18, 2015)).
26 was enclosed with this letter. On February 27, 2015, Blankenship sent to Alpha an
executed undertaking in the same form (the “Alpha Undertaking”). 102
On March 2, 2015, Alpha rejected Blankenship’s demand to advance his defense
costs. The letter from Cleary Gottlieb stated, in relevant part:
As you know, Blankenship has previously demanded advancement for such fees and costs, and executed an undertaking on April 12, 2011. Accordingly, advancement of fees and costs in relation to this matter is subject to the April 2011 undertaking and Alpha has no obligation to advance such fees and costs.
Alpha welcomes the opportunity to address this matter more fully in Delaware Chancery Court. 103
As of April 1, 2015, the date of the Pre-Trial Stipulation and Order in this action,
Blankenship sought advancement of $5,808,885.64 in unpaid defense costs incurred in
connection with the U.S. Attorney’s investigation and the Criminal Proceeding. 104
L. Procedural History
On February 5, 2015, Blankenship filed the Complaint seeking advancement from
Defendants. The Complaint asserts four counts for relief: (i) advancement under 8 Del.
C. § 145 and Massey’s Charter (Count I); (ii) advancement under the Engagement Letter
(Count II); (iii) advancement under the Merger Agreement (Count III); and (iv)
102 JX 48 (Alpha Undertaking). 103 JX 49 (Letter from Victor L. Hou of Cleary Gottlieb to Graeme W. Bush of Zuckerman Spaeder (Mar. 2, 2015)). 104 JX 57 (Zuckerman Spaeder invoices dated Dec. 31, 2014, Jan. 21, 2015, Feb. 26, 2015, and Mar. 12, 2015).
27 reimbursement of fees and expenses incurred in connection with this action (Count IV).
On February 24, 2015, Defendants filed their Answer. Discovery ensued.
On March 12, 2015, for reasons explained in a bench ruling of that date, I entered
a protective order providing, in part, that “Defendants shall not be permitted to introduce
evidence at trial concerning the factual or legal merits of the Criminal Proceeding except
any such evidence as possessed or considered by Defendants in connection with making
the Determination.” 105 On April 8, 2015, a one-day trial was held. On May 12, 2015, I
heard post-trial oral argument. On May 14, 2015, the parties completed supplemental
briefing on the issue of judicial estoppel.
III. LEGAL ANALYSIS
A. The Parties’ Contentions Concerning Massey’s Advancement Obligations Under its Charter
In Count I of the Complaint, Blankenship seeks advancement from Massey of his
legal expenses relating to the investigation that led to the Indictment and his defense of
the Criminal Proceeding under the Delaware General Corporation Law and Massey’s
October 2010 Amended and Restated Certificate of Incorporation (as defined above, the
“Charter”). 106 Under 8 Del. C. § 145(e), a corporation may advance “[e]xpenses
(including attorneys’ fees) incurred by an officer or director in defending any . . . action,
suit or proceeding . . . in advance of the final disposition of such action, suit or
105 Order Granting Pl.’s Mot. for a Protective Order ¶ 3 (Mar. 12, 2015). 106 Massey’s October 2010 Certificate of Incorporation contained the same language regarding advancement for officers and directors as its Certificate of Incorporation that was in force from November 2000 to October 5, 2010. Pre-Trial Stip.¶ 2(7); JX 1.
28 proceeding upon receipt of an undertaking by or on behalf of such director or officer to
repay such amount if it shall ultimately be determined that such person is not entitled to
be indemnified by the corporation.” As to former directors and officers, the default rule
in the statute is that “[s]uch expenses (including attorneys’ fees) incurred by former
directors and officers . . . may be so paid upon such terms and conditions, if any, as the
corporation deems appropriate.” 107
Article Fifteenth of the Charter provides mandatory indemnification and
advancement rights for a former Massey director or officer who becomes a party to a
legal proceeding by reason of the fact that he or she was a director or officer of Massey:
Each person who was or is made a party or is threatened to be made a party to or is involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (hereinafter a “proceeding”), by reason of the fact that he or she . . . is or was a director or officer of the Corporation . . . shall be indemnified and held harmless by the Corporation to the fullest extent authorized by the Delaware General Corporation Law . . . against all expense, liability and loss (including attorneys’ fees . . . ) reasonably incurred or suffered by such person in connection therewith and such indemnification shall continue as to a person who has ceased to be a director, [or] officer[.] . . . The right to indemnification conferred in this Article shall be a contract right and shall include the right to be paid by the Corporation the expenses incurred in defending any such proceeding in advance of its final disposition; provided, however, that, if the Delaware General Corporation Law requires, the payment of such expenses incurred by a director or officer in his or her capacity as a director or officer . . . in advance of the final disposition of a proceeding, shall be made only upon delivery to the Corporation of an undertaking, by or on behalf of such director or officer, to repay all amounts so advanced if it shall ultimately be determined that such director
107 8 Del. C. § 145(e).
29 or officer is not entitled to be indemnified under this Article or otherwise. 108
Defendants admit that Blankenship has been charged with crimes in the Criminal
Proceeding by reason of the fact that he was a director and officer of Massey and certain
affiliated companies. 109 Defendants, who had been advancing Blankenship’s legal
expenses in connection the U.S. Attorney’s investigation before the Indictment, have
further acknowledged throughout this case that Blankenship would be entitled to
advancement under the Charter for the Criminal Proceeding but for the Determination
Cavatoni made on behalf of Massey that the Reasonable Cause Representation in the
Undertaking had been breached. 110 Thus, the key question in this case pertaining to
Massey’s advancement obligations is whether a breach of the Reasonable Cause
Representation in the Undertaking is a proper basis for termination of Blankenship’s
advancement rights. The answer to this question depends on the meaning of the
Contingency Provision in the Undertaking, which states in relevant part:
It is my understanding that Massey will indemnify me and/or advance on my behalf the fees and costs associated with this representation, contingent upon the following factual representations and undertakings, which I hereby make and declare to be true [as defined above, the “Contingency Provision”]:
...
2. In the performance of my actions as an officer, director, employee, and consultant of Massey and/or any of its affiliates and 108 JX 24 (Charter) at Art. Fifteenth. 109 Pre-Trial Stip. ¶ 2(2). 110 Defs.’ Ans. Br. 1-25; see also Defs.’ Opp’n to Mot. to Expedite Proceeding 4-6.
30 subsidiaries, including but not limited to MCS, I had no reasonable cause to believe that my conduct was ever unlawful [as defined above, the “Reasonable Cause Representation”][.] 111
Massey argues that the Contingency Provision can only reasonably be interpreted
to mean that Massey’s advancement obligations are “contingent upon the factual
representations themselves, not merely a superficial recital of those representations,
without regard to their truth.” 112 Thus, according to Massey, because Blankenship
“agreed that Massey’s obligation to advance his fees was contingent upon the truthfulness
of his factual representations in the Undertaking, [he] necessarily agreed that Massey
would not be obligated to advance his fees if it determined that his factual representations
were untrue.” 113
Massey concedes that its interpretation of the Undertaking would permit it to
terminate Blankenship’s advancement rights in at least three scenarios: (1) under the first
part of the Termination Provision, if Blankenship should enter a plea of guilty, or be
found guilty by a court or jury, on any criminal charge related to his actions as a director
or officer of Massey; (2) under the second part of the Termination Provision, if Massey
otherwise determined that Blankenship is not entitled to indemnification; and (3) under
the Contingency Provision, if Blankenship “ever” should breach either of the listed
111 JX 28 (Undertaking) at ANR_AAR-00000442. 112 Defs.’ Ans. Br. 10. 113 Id.
31 factual representations, including the Reasonable Cause Representation. 114 Massey has
not relied on either part of the Termination Provision as a basis to cease advancement. 115
The sole provision of the Undertaking upon which Massey relied in making the
Determination was the Contingency Provision.
Blankenship counters that the only reasonable interpretation of the Contingency
Provision is that “the obligation of Massey . . . to commence advancing depended upon
Mr. Blankenship making ‘the following factual representations and undertakings[.]’ ”116
In other words, the enumerated factual representations, including the Reasonable Cause
Representation, were simply assurances to Massey. Thus, he maintains that the
Contingency Provision does not permit Massey to “stop advancing before the ultimate
disposition of the underlying Criminal Proceeding if Massey later came to believe that
the statements in numbered paragraphs 1 and 2 were not true.” 117 For the reasons
discussed below, I agree with Blankenship’s interpretation of the Contingency Provision.
114 Tr. of Oral Arg. 67-69. Although this issue is not ripe for judicial resolution, Massey also contends that, under the Undertaking, it may terminate Blankenship’s indemnification rights in the same scenarios. Defs.’ Ans. Br. 16. 115 Tr. of Oral Arg. 67-69; see also Defs.’ Ans. Br. 16 (“[Defendants] have not made, and may never make, a decision with respect to Mr. Blankenship’s right to indemnification.”). 116 Pl.’s Op. Br. 11. 117 Id.
32 B. The Contingency Provision Does Not Permit Massey to Terminate Blankenship’s Advancement Rights
Because Blankenship’s advancement rights under Massey’s Charter are, by their
terms, contract rights, I interpret the provisions of the Undertaking according to contract
interpretation principles. Delaware law “adheres to the objective theory of contracts,” 118
which requires a court to interpret a particular contractual term to mean “what a
reasonable person in the position of the parties would have thought it meant.” 119
Delaware courts interpret a contractual term that is reasonably or fairly susceptible to
only one interpretation according to the term’s plain meaning. 120 That the parties dispute
how to interpret a term does not mean that their interpretations are reasonable or that the
term is ambiguous. Rather, only “when the provisions in controversy are reasonably or
fairly susceptible of different interpretations or may have two or more different
meanings” are the provisions deemed ambiguous. 121 If a contractual term is ambiguous,
a Delaware court must consider extrinsic evidence “to determine the meaning the parties
intended.” 122 Applying these principles here, I find that a reasonable person in the
position of the parties would not have thought that Blankenship’s advancement rights
118 Salamone v. Gorman, 106 A.3d 354, 367 (Del. 2014) (citation omitted). 119 Rhone-Poulenc Basic Chems. Co. v. Am. Motorists Ins. Co., 616 A.2d 1192, 1196 (Del. 1992). 120 See Osborn ex rel. Osborn v. Kemp, 991 A.2d 1153, 1159-60 (Del. 2010). 121 See Rhone-Poulenc, 616 A.2d at 1196. 122 Appriva S’holder Litig. Co., LLC v. ev3, Inc., 937 A.2d 1275, 1291 (Del. 2007).
33 could be terminated based on an alleged breach of the Reasonable Cause Representation
for several, inter-related reasons.
First, when construing the Undertaking as a whole and giving meaning to each of
its provisions, 123 Massey’s interpretation is unreasonable because it equates the meaning
and effect of the Contingency Provision with those of the Termination Provision. Those
two provisions are structured differently and, in my opinion, were intended to serve
different purposes. The Termination Provision explicitly lists certain situations in which
Massey “shall not be obligated to . . . advance further fees” to Blankenship, namely, if (1)
Blankenship enters a guilty plea or is found guilty by a court or jury related to his actions
as a director or officer of Massey, or (2) Massey “otherwise determines” that Blankenship
is not entitled to indemnification. Conspicuously absent from this list is any reference to
the truthfulness of the two enumerated factual representations in the Undertaking.
Applying the interpretive principle that “the expression of one thing is the exclusion of
another,” 124 the plain terms and clear limitations of the Termination Provision
demonstrate that the drafter of the Undertaking did not intend for the Contingency
Provision to be a legal basis on which Massey could be relieved of advancing
123 See GMG Capital Invs., LLC v. Athenian Venture P’rs I, L.P., 36 A.3d 776, 779 (Del. 2012) (“When interpreting a contract, the Court will give priority to the parties’ intentions as reflected in the four corners of the agreement.”); E.I. du Pont de Nemours & Co., Inc. v. Shell Oil Co., 498 A.2d 1108, 1113 (Del. 1985) (“In upholding the intentions of the parties, a court must construe the agreement as a whole, giving effect to all provisions therein.”). 124 Miramar Police Officers’ Ret. Plan v. Murdoch, 2015 WL 1593745, at *8 (Del. Ch. Apr. 7, 2015) (citing Delmarva Health Plan, Inc. v. Aceto, 750 A.2d 1213, 1216 (Del. Ch. 1999)).
34 Blankenship’s legal fees. Only Blankenship’s interpretation yields a different meaning
for these different provisions.
Second, applying the definition of “contingent” from Black’s Law Dictionary, 125
which defines “contingent” to mean “[d]ependent on something else; conditional,” 126 the
Contingency Provision logically was intended to relate to the commencement of
Massey’s advancement obligations concerning the federal criminal investigation that
began after the UBB explosion 127—a topic that was not referenced in the earlier June
2010 undertaking 128—and was not intended to provide a basis on which Massey could
terminate those obligations. This conclusion is supported by the fact that the phrase
“contingent upon” in the first paragraph of the Undertaking not only applied to the two
enumerated factual representations of the Undertaking, but also applied to Blankenship’s
agreement to repay any advanced expenses in numbered paragraph 3 if it should
125 See Lorillard Tobacco Co. v. Am. Legacy Found., 903 A.2d 728, 738 (Del. 2006) (“Delaware courts look to dictionaries for assistance in determining the plain meaning of terms which are not defined in a contract.”). 126 Black’s Law Dictionary at 362 (9th ed. 2009). 127 Pre-Trial Stip. ¶ 2(19). The Undertaking expressly references that Blankenship had retained counsel to represent him in connection with “a federal grand jury investigation conducted by the Office of the United States Attorney for the Southern District of West Virginia and agents of the Federal Bureau of Investigation and Federal Mine Safety and Health Administration.” JX 28 (Undertaking) at ANR_AAR-00000442. 128 In the June 2010 undertaking, Blankenship requested advancement for expenses incurred “in connection with litigation regarding the Company’s compliance with environmental and safety regulations, including but not limited to derivative actions alleging breaches of fiduciary duties on the part of the Company’s Board of Directors and certain executives, federal securities, litigation and various shareholder demands.” JX 22.
35 ultimately be determined that he is not entitled to indemnification. Blankenship’s
undertaking of such a repayment obligation plainly did not provide a basis on which
Massey could later terminate its advancement obligations; it simply provided an
assurance that Blankenship would repay if it ultimately should be determined that he is
not entitled to indemnification. It would be nonsensical to construe the phrase
“contingent upon” differently with respect to the two factual representations in numbered
paragraphs 1 and 2 to which it applies than with respect to the agreement to repay in
numbered paragraph 3 to which it also applies. 129 Thus, the use of the phrase “contingent
upon” logically could not have been intended to provide Massey a license to terminate its
advancement obligations in the future. Instead, “contingent upon” can only reasonably
be interpreted to require that Blankenship provide certain assurances as a condition to
Massey agreeing to commence advancement for the federal criminal investigation.
The foregoing interpretation of the Contingency Provision is consistent with then-
Vice Chancellor Strine’s comments about the import of functionally equivalent language
in the undertaking at issue in Thompson v. Williams Companies, Inc. 130 In that case, a
former employee (Thompson) of Williams Power Company (Power) challenged as
unreasonable the terms of a proposed undertaking that Power sought as a condition to
129 See Comerica Bank v. Global Payments Direct, Inc., 2014 WL 3567610, at *11 (Del. Ch. July 21, 2014) (“Absent anything indicating a contrary intent, the same phrase should be given the same meaning when it is used in different places in the same contract.” (citing, inter alia, In re Mobilactive Media, LLC, 2013 WL 297950, at *19 (Del. Ch. Jan. 25, 2013)). 130 2007 WL 3326007 (Del. Ch. July 31, 2007).
36 granting advancement of Thompson’s legal expenses for a criminal investigation and
proceeding. Similar to the Undertaking here, Power’s proposed undertaking included
representations that Thompson “acted at all times as an employee . . . of [Power] in good
faith and for a purpose that [he] reasonably believed to be in the best interests of [Power]
and/or any related entities,” and that he “ha[s] no reasonable cause to believe [his]
conduct was unlawful at any time.” 131 Power’s advancement bylaw provided, in part,
that “[e]xpenses incurred by other employees and agents shall be paid upon such terms
and conditions, if any, as the Board of Directors deems appropriate.” 132
In determining that Power had the legal authority under the company’s bylaws to
condition advancement to Thompson (a former employee) upon “appropriate” terms and
conditions, then-Vice Chancellor Strine interpreted “appropriate” in that context to mean
“rationally related to a proper corporate interest.” 133 He then observed that the good faith
and reasonable cause representations in the proposed undertaking qualified as
“appropriate” terms and conditions because he read each to be a “reassuring prerequisite”
necessary for advancement to commence rather than as a “license” for the company to
cease continued advancement:
Power’s demand that Thompson certify that he acted in a manner that was consistent with his ultimate entitlement to indemnification was also appropriate. By that means, Power simply demanded that Thompson evidence his personal belief that he had acted in a manner entitling him to
131 Id. at *2. 132 Id. at *1. 133 Id. at *6.
37 indemnification under the plain terms of the Indemnification Bylaw. The Power board knew that the federal authorities had procured an indictment charging Thompson with having engaged in conduct that cannot be indemnified; it simply wanted Thompson to certify that he believes himself to have acted lawfully and faithfully. That may seem useless to those of a cynical bent, but I do not believe it inappropriate for the Power board to desire an attestation of good faith from a former employee facing serious criminal charges before extending him hundreds of thousands of dollars in interest-free credit.
I do not read the condition that Thompson certify that he believes his past behavior as an employee of Power entitles him to ultimate indemnification as giving Power a license to deny him further advancement if it concludes he lied before his criminal prosecution is concluded. Rather, I read it as manifesting the board’s demand for an affirmative representation by Thompson of his own belief in the good faith and legality of his actions while an employee as a reassuring prerequisite to advancing him company funds. 134
Similarly here, the Contingency Provision, construed logically, makes sense as a form of
reassurance to Massey, but not as a license for Massey to deny Blankenship further
advancement if he “ever” had reasonable cause to believe that any action he took arising
from his actions as an officer, director or employee of Massey was unlawful. 135
134 Id. at *7-8. Massey seeks to distinguish Thompson because the undertaking there merely asked Thompson to “confirm[] and agree[]” to the factual representations and did not make advancement “contingent upon” those representations. Defs.’ Ans. Br. 11; Defs.’ Ans. Br. Ex. A. In my view, the “confirm and agree” language on which Massey relies to distinguish the undertaking at issue in Thompson is not a readily identifiable basis for the Court’s discussion about the limited nature of the representations in that case. In any event, the phrase “contingent upon” does not have the meaning Massey ascribes to it for the reasons stated above. 135 The Undertaking applies jointly to Massey, a Delaware corporation, and to Performance and MCS, both of which are West Virginia corporations. The statutory requirements for advancement under West Virginia law offer a logical and plausible explanation for why the factual representations appear in the Undertaking, and that
38 Third, Massey’s interpretation of the Contingency Provision would afford it such
broad discretion to cease advancement of Blankenship’s legal expenses so as to lead to
absurd results that, in my view, “no reasonable person would have accepted” when
executing the Undertaking. 136 An example discussed by counsel at post-trial argument
demonstrates the point. Say that Massey found an audiotape in which Blankenship is
recorded as saying that, while driving a truck to inspect one of Massey’s coal mines, he
exceeded the legal speed limit. Counsel for Massey conceded at argument that, based on
such an audiotape, and subject to a good faith and reasonableness standard, the company
would be permitted under its interpretation of the Undertaking to cease advancement for
Blankenship’s fees in the Criminal Proceeding, even if (1) the speeding is wholly
unrelated to any of the claims for which Blankenship seeks advancement; (2) a police
explanation is consistent with construing them as reassurances and not as a basis for terminating advancement. Under Section 853(a)(1) of the West Virginia Business Corporation Act, a corporation may advance legal expenses to a director upon delivery of “a written affirmation of his or her good faith belief that he or she has met the relevant standard of conduct described in section eight hundred fifty-one of this article.” W. Va. Code § 31D-8-853(a)(1). Section 851(a) provides, in relevant part, that “a corporation may indemnify an individual who is a party to a proceeding because he or she is a director against liability incurred in the proceeding if: (1) . . . (B) He or she reasonably believed: (i) In the case of conduct in his or her official capacity, that his or her conduct was in the best interests of the corporation; . . . and (C) In the case of any criminal proceeding, he or she had no reasonable cause to believe his or her conduct was unlawful.” W. Va. Code § 31D-8-851(a). A West Virginia corporation may indemnify and advance legal expenses to an officer “[t]o the same extent as a director.” W. Va. Code § 31D-8-856(a)(1). I have not considered the terms of any advancement provisions in the charters of Performance or MCS. 136 See Osborn, 991 A.2d at 1160 (“An unreasonable interpretation produces an absurd result or one that no reasonable person would have accepted when entering the contract.”).
39 officer who was nearby did not pull Blankenship over for speeding; or (3) Blankenship
actually was not speeding, even though he thought he was. 137 This example, which flows
from the logic of Massey’s proffered interpretation, demonstrates the unreasonableness of
its construction of the Undertaking.
For the reasons discussed above, I conclude that Blankenship has provided the
only reasonable interpretation of the Contingency Provision. Even if the Contingency
Provision arguably was ambiguous, however, the weight of the evidence surrounding the
drafting and execution of the Undertaking, although limited, also supports Blankenship’s
interpretation as does the public policy of Delaware, which supports resolving ambiguity
in favor of indemnification and advancement.
Under Delaware law, extrinsic evidence that is probative of the meaning of an
ambiguous contractual term includes “the overt statements and acts of the parties, the
business context, prior dealings between the parties, and the business customs and usage
in the industry.” 138 As noted above, the parties never discussed the meaning of the
Undertaking when it was first proposed or later executed. Thus, Blankenship’s and
Taylor’s testimony about their subjective understandings of the Undertaking is not
137 Tr. of Oral Arg. 41-43, 46-47. 138 Bell Atl. Meridian Sys. v. Octel Commc’ns Corp., 1995 WL 707916, at *6 (Del. Ch. Nov. 28, 1995).
40 probative of the parties’ shared understanding of the meaning and effect of the
Undertaking. 139
The only contemporaneous documentary evidence concerning the Undertaking is
Ojeda’s cover letter to Taylor, in which she wrote that the Undertaking “clarifies the
relationship between Massey and your client(s) with respect to their legal representation
in this matter and payment therefor.” 140 In ordinary usage, the word “clarify” means
“make (a statement or situation) less confused and more clearly comprehensible.” 141
Applying that definition here, and in the absence of any contrary evidence on the subject,
I do not believe a reasonable person would construe the term “clarify” to mean that
Massey would be afforded sweeping discretion to terminate Blankenship’s advancement
rights in ways it indisputably had no legal right to demand. Stated more directly, saying
that Massey’s interpretation of the Contingency Provision “clarifies” Massey’s
advancement obligations to Blankenship would be a gross mischaracterization given that
139 See United Rentals, Inc. v. RAM Hlgs., Inc., 937 A.2d 810, 835 (Del. Ch. 2007) (“[T]he private, subjective feelings of the negotiators are irrelevant and unhelpful to the Court’s consideration of a contract’s meaning, because the meaning of a properly formed contract must be shared or common.”).
Because privilege was asserted over the advice Zuckerman Spaeder gave Blankenship concerning the Undertaking, I give no weight to the circumstances of that advice, although the non-privileged fact that Zuckerman Spaeder reviewed the Undertaking for one hour in total tends to support the inference that no one at the firm thought that the Contingency Provision was intended to have the effect that Massey advocates here. 140 JX 27 (emphasis added). 141 New Oxford American Dictionary at 319 (3d ed. 2010).
41 such an interpretation would represent a highly unusual and fundamental change of his
advancement rights.
Additionally, Ojeda testified that the Undertaking was intended as a
“confirmation” or “restatement” of Massey’s advancement obligations to Blankenship,
which “had already been established.” 142 Defendants did not present any
contemporaneous, conflicting evidence. 143 Ojeda’s unrebutted testimony thus accords
with my reading of the cover letter and undermines Massey’s argument that the
Contingency Provision was intended to fundamentally alter Blankenship’s advancement
rights. 144
Finally, as this Court observed in Miller v. Palladium Industries, Inc. 145 and
elsewhere, Delaware’s salutary public policy of “attracting the most capable people into
142 Ojeda Dep. 32-33. 143 See Senior Hous. Capital, LLC v. SHP Senior Hous. Fund, LLC, 2013 WL 1955012, at *42 (Del. Ch. May 13, 2013) (“No CalPERS employee testified to what the parties did intend when they negotiated the Management Agreements, and this undercuts CalPERS’ argument.” (citing Smith v. Van Gorkom, 488 A.2d 858, 878 (Del. 1985))). 144 Massey contends that, in agreeing to the Contingency Provision, Blankenship voluntarily agreed to make conditional the mandatory advancement rights to which he would otherwise be entitled. Defs.’ Ans. Br. 21-25. I disagree. Under Delaware law, “[w]aiver is the voluntary and intentional relinquishment of a known right,” and the evidence of a waiver “must be unequivocal in character.” Realty Growth Investors v. Council of Unit Owners, 453 A.2d 450, 456 (Del. 1982). For the reasons discussed above, the Contingency Provision does not unambiguously mean what Massey interprets it to mean. At most, the Contingency Provision is ambiguous, but “[a] waiver will not be implied based on ambiguous acts.” Dirienzo v. Steel P’rs Hldgs. L.P., 2009 WL 4652944, at *5 (Del. Ch. Dec. 8, 2009). 145 2012 WL 6740254 (Del. Ch. Dec. 31, 2012), aff’d, 72 A.3d 502 (Del. 2013) (ORDER).
42 corporate service” 146 through broad indemnification and advancement protections
supports resolving ambiguity in an instrument governing advancement rights in favor of
advancement. 147 The Supreme Court has described advancement as “provid[ing]
corporate officials with immediate interim relief from the personal out-of-pocket
financial burden of paying the significant on-going expenses inevitably involved with
investigations and legal proceedings.” 148 Against this public policy backdrop, I find the
present circumstances—where Massey exclusively drafted the Undertaking and never
gave Blankenship fair notice that it intended for the Undertaking to fundamentally alter
his right to advancement—support interpreting any ambiguity in the Undertaking in favor
of Blankenship’s advancement rights. Thus, if the Contingency Provision were
ambiguous, I would construe the provision against Massey and adopt Blankenship’s
interpretation on this alternative ground.
*****
For the reasons discussed above, I conclude that the Contingency Provision in the
Undertaking does not afford Massey a legal basis on which to terminate Blankenship’s
146 Homestore, Inc. v. Tafeen, 888 A.2d 204, 218 (Del. 2005). 147 Miller, 2012 WL 6740254, at *3 (“Delaware policy favors indemnification and advancement as a means of attracting qualified individuals to serve in important corporate capacities. That policy supports the approach of resolving ambiguity in favor of indemnification and advancement.”); see also Sun-Times, 954 A.2d at 404 (“[T]o the extent there is any ambiguity in the meaning of final disposition in the advancement context, the Delaware policy gloss favoring advancement to corporate officials supports resolving that ambiguity in favor of advancement[.].”). 148 Homestore, 888 A.2d at 211.
43 right to advancement under the Charter. Massey has advancement obligations to
Blankenship for the Criminal Proceeding under the Charter, and, as I note below, 149 those
obligations survived the merger under Section 5.05(a) of the Merger Agreement. As
such, the Determination had no legal force, and I thus do not need to decide whether it
was “based on reasonable grounds and made in good faith,” 150 which the parties agree to
be the operative standard of review. 151
C. The Engagement Letter Does Not Provide Blankenship with an Independent Basis for Advancement
In Count II of the Complaint, Blankenship seeks to recover his unpaid legal
expenses under the Engagement Letter that was counter-signed by Massey’s General
149 See infra Part III.D. 150 Pl.’s Op. Br. 34; Defs.’ Ans. Br. 34; see also ASB Allegiance Real Estate Fund v. Scion Breckenridge Managing Member, LLC, 50 A.3d 434, 441 (Del. Ch. 2012) (“When exercising a discretionary right, a party to the contract must exercise its discretion reasonably.”), rev’d in part on other grounds, 68 A.3d 665 (Del. 2013). 151 Although I reach no conclusion whether this standard was met, I feel I would be remiss not to express my serious doubts that the Determination was reasonable. Based on the manner in which Verheij selected the excerpts that became Appendix A of the Cleary Memo—without reviewing the underlying documents or audiotapes in context—it appears that the materials provided to Cavatoni were cherry-picked to lead to a preordained conclusion. The evidence at trial also demonstrated the obvious importance of context in considering those excerpts. When Cavatoni was confronted on cross- examination by additional documentary evidence and additional segments of audiotape to contextualize various excerpts in Appendix A—materials he was not provided and had not reviewed in making the Determination—the import of those excerpts took on an entirely different meaning. Further complicating matters, privilege was asserted over Cleary Gottlieb’s advice to the MLAC, to Alpha management, and to Cavatoni individually, even though Defendants not so subtly sought to bolster the reasonableness of the Determination based on the work Cleary Gottlieb had done on Alpha’s behalf. This placed Blankenship in an unfair position at trial and left the Court with a cramped picture of the process leading to the Determination.
44 Counsel. Specifically, Blankenship contends that the Engagement Letter “established an
unambiguous contractual obligation separate and apart from any obligations assumed
through the [Charter] or the Merger Agreement.” 152 I disagree.
The key sentence of the Engagement Letter upon which Blankenship relies is the
statement that “Massey Energy Company agrees to pay all fees and expenses incurred
within thirty days of the date of any invoice.” 153 In my opinion, the only reasonable
interpretation of this language, 154 included in a document whose express purpose was to
“set forth in writing the basis of [Zuckerman Spaeder’s] fees at the beginning of a
representation” in accordance with the District of Columbia Rules of Professional
Conduct, 155 is the one Massey proffers, i.e., that the Engagement Letter sets forth nothing
more than the agreed-upon invoice terms and payment schedule under which Zuckerman
Spaeder would bill Massey and Massey would pay Zuckerman Spaeder. 156
Taken to its logical extreme, interpreting the Engagement Letter to be an
unconditional commitment for Massey to pay Blankenship’s legal fees without regard to
the reasonableness of the fees or any nexus between the legal services performed and
Blankenship’s conduct as a current or former director or officer of Massey would
152 Pl.’s Op. Br. 27. 153 JX 21 (Engagement Letter) at DBDEL0010. 154 Because the parties have not briefed the conflict of laws issue, I construe the Engagement Letter as if it were governed by Delaware law. 155 Id. at DBDEL0009. 156 Defs.’ Ans. Br. 25-26.
45 produce absurd results that no reasonable person would accept. 157 Indeed, given that the
Engagement Letter does not limit Massey’s payment obligations by reference to whether
Blankenship is ultimately entitled to indemnification under the Charter or Delaware law,
his argument about its meaning is untenable because such an unconditional payment
obligation would exceed the scope of indemnification that a Delaware corporation may
lawfully undertake. 158 Therefore, I find that Defendants are entitled to judgment in their
favor under Count II.
D. Blankenship has Advancement Rights against Alpha for the Criminal Proceeding under Section 5.05(b) of the Merger Agreement
In Count III of the Complaint, Blankenship seeks advancement from Alpha of his
legal expenses incurred in the Criminal Proceeding under Section 5.05(b) of the Merger
Agreement. That section sets forth the advancement and indemnification obligations that
Alpha (defined as “Parent”) owes to the defined “Indemnified Parties,” which include
Blankenship as a former director and officer of Massey:
Without limiting Section 5.05(a) or any rights of any Indemnified Party pursuant to any indemnification agreement, from and after the Effective Time, in the event of any threatened or actual claim, action, suit, proceeding or investigation (a “Claim”), whether civil, criminal or administrative in which any person who is now, or has been at any time
157 See Osborn, 991 A.2d at 1160. 158 See, e.g., Sun-Times Media Gp., Inc. v. Black, 954 A.2d 380, 404 n.93 (Del. Ch. 2008) (“[A]s far as § 145 is concerned, Delaware corporations lack the power to indemnify a party who did not act in good faith or in the best interests of the corporation.” (citation omitted)). Although I find the Engagement Letter to be unambiguous, my interpretation of that document is further supported by Blankenship’s deposition testimony, where he conceded that he did not think he obtained broader indemnification or advancement rights by signing the Engagement Letter than those he already had. Blankenship Dep. 48-49.
46 prior to the date of this Agreement, . . . a director or officer of the Company is or is threatened to be, made a party in his or her capacity as a director or officer of the Company, each of Parent and the Surviving Corporation shall indemnify and hold harmless, to the fullest extent the Company would have been permitted to do so under applicable Law (for the avoidance of doubt, subject to the limitations on the Company’s ability to indemnify its directors and officers under Section 145 of the DGCL), each such Indemnified Party in his or her capacity as a director or officer of the Company or any of its Subsidiaries, or any of their respective predecessors, against any losses, claims, damages, liabilities, costs, expenses (including reasonable attorney’s fees and expenses in advance of the final disposition of any Claim to each Indemnified Party to the fullest extent permitted by Law upon receipt of any undertaking in favor of Parent and the Surviving Corporation of a type contemplated by the Company Certificate of Incorporation), judgments, fines and amounts paid in settlement of or in connection with any such threatened or actual Claim, arising out of, or pertaining to (i) the fact that such an Indemnified Party was a director . . . or officer of the Company . . . , prior to the Effective Time or (ii) this Agreement or any of the transactions contemplated hereby, whether in any case asserted or arising before or after the Effective Time. 159
Because the Merger Agreement is governed by Delaware law, 160 the same contract
interpretation principles discussed above apply in determining whether Alpha has
advancement obligations to Blankenship for the Criminal Proceeding under the Merger
Agreement. Section 5.05(e) of the Merger Agreement states that the “provisions of
Section 5.05 are intended to be for the benefit of, and will be enforceable by, each
Indemnified Party.” 161 Thus, Blankenship has standing to enforce the provision.
The parties’ arguments regarding Section 5.05(b) implicate two textual issues
concerning the temporal scope of the provision. The first issue is premised on the
159 JX 26 (Merger Agreement) at § 5.05(b) (emphasis added). 160 Id. at § 8.08. 161 Id. at § 5.05(e).
47 interaction of Section 5.05(b) with Section 5.05(a). That earlier section generally
provides that Blankenship’s indemnification and advancement rights from Massey (not
Alpha) for “acts or omissions occurring at or prior to the Effective Time” of the merger—
which was June 1, 2011—shall survive the merger:
All rights to indemnification and exculpation from liabilities for acts or omissions occurring at or prior to the Effective Time and rights to advancement of expenses relating thereto now existing in favor of any person who is . . . , or has been at any time prior to the date of this Agreement, a director, officer, employee or agent . . . of the Company, any of its Subsidiaries or any of their respective predecessors (each, an “Indemnified Party”) as provided in the Company Certificate of Incorporation, the Company Bylaws, the organizational documents of any Subsidiary of the Company or any indemnification agreement between such Indemnified Party and the Company or any of its Subsidiaries . . . shall survive the Merger and shall not be amended, repealed or otherwise modified in any manner that would adversely affect any right thereunder of any such Indemnified Party without the consent of such Indemnified Party. 162
Thus, under Section 5.05(a), Massey’s advancement obligations to Blankenship for the
U.S. Attorney’s investigation and the resulting Criminal Proceeding survived the merger.
Relying on language appearing at the beginning of Sections 5.05(a) and (b), respectively,
Alpha argues that Section 5.05(a) was intended to cover claims based on conduct (i.e.,
“acts or omissions”) occurring “prior to the Effective Time” while Section 5.05(b) was
intended to cover claims based on conduct occurring “from and after the Effective
Time.” 163 In effect, Alpha contends that Sections 5.05(a) and (b) are mutually
162 Id. at § 5.05(a) (emphasis added). 163 Defs.’ Ans. Br. 28-30.
48 exclusively with the line of demarcation between the two being when the underlying
conduct that forms the basis of a claim occurred.
This argument is plainly without merit. Alpha has not identified any text in the
Merger Agreement stating that the Section 5.05(a) and (b) were intended to be mutually
exclusive based on the timing of underlying conduct. To the contrary, Section 5.05(b)
contains explicit language demonstrating that it was intended to cover claims relating to
conduct occurring before the Effective Time. Specifically, Section 5.05(b) encompasses
claims “arising out of, or pertaining to (i) the fact that such an Indemnified Party was a
director … or officer of [Massey] . . . prior to the Effective Time.” That does not mean
that Section 5.05(b) necessarily covers all claims relating to the conduct of a Massey
director or officer occurring before the Effective Time, just that such a claim may be
encompassed by Section 5.05(b) if the other conditions of that section are met.
The second temporal issue implicated by Section 5.05(b) focuses on when a claim
is asserted as opposed to when the underlying conduct occurred. Alpha acknowledges
that Section 5.05(b) of the Merger Agreement “obligates [it] to advance fees to the
former Massey directors and officers for new claims, meaning claims that are threatened
or instituted after the Effective Time of the merger, on June 1, 2011.” 164 But, Alpha
argues that the fact that Blankenship “was indicted in November 2014 did not somehow
create a ‘new’ claim that would fall under the scope of Section 5.05(b).” 165
164 Id. 29. 165 Id. 30.
49 In my opinion, although Alpha glosses over the actual language of Section
5.05(b), it is half right. As I construe Section 5.05(b), it generally covers actions or
proceedings in which an Indemnified Party is made or threatened to be made a party
“from and after the Effective Time.” 166 This conclusion follows from the text of Section
5.05(b) emphasized below:
. . . from and after the Effective Time, in event of any threatened or actual claim, action, suit, proceeding or investigation (a “Claim”), whether civil, criminal or administrative in which any person … is or is threatened to be, made a party in his or her capacity as a director or officer of the Company, each of Parent [Alpha] and the Surviving Corporation [Massey] shall indemnify and hold harmless, to the fullest extent the Company would have been permitted to do so under applicable Law . . . , each such Indemnified Party in his or her capacity as a director or officer of the Company . . . against any losses, claims, damages, costs, expenses (including reasonable attorney’s fees and expenses in advance of the final disposition of any Claim to each Indemnified Party . . . ) . . . . 167
I disagree with Alpha’s assertion, however, that the Indictment did not trigger coverage
for the Criminal Proceeding under Section 5.05(b). Blankenship was made a party to the
Criminal Proceeding by virtue of the Indictment, which was issued on November 13,
2014. Thus, he became a party to a criminal proceeding after the Effective Time and is
thereby entitled to advancement from Alpha under the plain language of Section 5.05(b)
as long as the conduct for which he was charged falls within the scope of the type of
conduct covered by Section 5.05(b). For the reasons discussed above, the conduct for
166 Section 5.05(b)(ii) contains an exception. That subpart covers claims arising out of or pertaining to the Merger Agreement or any of the transactions contemplated thereby “whether in any case asserted or arising before or after the Effective Time.” JX 26 (Merger Agreement) at § 5.05(b)(ii). 167 Id. at § 5.05(b) (emphasis added).
50 which he now has been charged criminally falls within the scope of Section 5.05(b)
because it indisputably arises out of and pertains to the fact that he was a director and
officer of Massey before the Effective Time. 168
Alpha has offered no textual support for the notion that the Criminal Proceeding to
which he was made a party by virtue of the Indictment should relate back to the U.S.
Attorney’s criminal investigation for which Massey was providing advancement to
Blankenship before the Effective Time so as to remove the Criminal Proceeding from the
ambit of Section 5.05(b). 169 Had the drafters of the Merger Agreement intended to
incorporate a relation-back limitation on Alpha’s advancement and indemnification
obligations, they presumably could have done so. But they did not. Instead, they drafted
Section 5.05(b) so that it would cover certain proceedings in which an Indemnified
Person is made a party to a proceeding after the Effective Time arising out of or relating
to his or her conduct as a Massey director or officer before the Effective Time. The
Criminal Proceeding is such a proceeding.
To summarize, taking into account the two temporal issues concerning the
construction of Section 5.05(b) discussed above, Blankenship is entitled to advancement
from Alpha for the Criminal Proceeding under that section because (1) the Indictment
was handed down on November 13, 2014, meaning that Blankenship was made a party to
168 Pre-Trial Stip. ¶ 2(2). 169 The merger closed in June 2011. As reflected by the Undertaking, which Blankenship signed on April 12, 2011, Massey agreed to advance Blankenship “in connection with a federal criminal grand jury investigation” before the Effective Time. JX 28 (Undertaking) at ANR_AAR-00000442.
51 the Criminal Proceeding after the Effective Time; and (2) Section 5.05(b)(i) plainly
covers the claims asserted in the Criminal Proceeding, which pertain to or arise out of the
fact that Blankenship was a director or officer of Massey before the Effective Time.
Alpha next contends that, under the equitable doctrine of judicial estoppel,
Blankenship should be precluded from contradicting the interpretation of Section 5.05 he
allegedly supported in Massey Energy Co. 170 The equitable doctrine of judicial estoppel
is “designed to protect the integrity of the judicial process by ‘prohibiting parties from
deliberately changing positions according to the exigencies of the moment.’ ” 171 In
Motorola Inc. v. Amkor Technology, Inc., 172 the Delaware Supreme Court explained that
“judicial estoppel operates only where the litigant contradicts another position that the
litigant previously took and that the Court was successfully induced to adopt in a judicial
ruling.” 173 That doctrine has no application here, in my opinion, because neither of the
elements required under Motorola are present.
Regarding the first element, Massey relies on two representations that were made
in defending against the issuance of a preliminary injunction in Massey Energy Co. The
first is a segment of a brief submitted in opposition to the stockholders plaintiffs’
preliminary injunction motion, which Blankenship joined. It states that:
170 Defs.’ Ans. Br. 29 n.23. 171 In re Silver Leaf, L.L.C., 2004 WL 1517127, at *2 (Del. Ch. June 29, 2004). 172 958 A.2d 852 (Del. 2008). 173 Id. at 859-60 (citation omitted).
52 Under the Merger Agreement, Massey’s directors, officers and employees are indemnified by Massey (not Alpha) for acts or omissions occurring before the merger to the same extent they were before the merger. ([Merger Agreement] §5.05(a)). With respect to new claims, they are indemnified by Massey and Alpha to the same extent they were indemnified by Massey pre-merger. (Id. §5.05(b)). In other words, the Merger Agreement provides Defendants with no greater indemnity than they would have received if [Massey] continued as an independent entity. 174
This quotation essentially rehashes the argument Alpha has asserted in this case. It does
not, however, contradict the interpretation of Section 5.05 Blankenship has advanced, and
which I have adopted, here—namely, that Blankenship is entitled to advancement from
Alpha for the Criminal Proceeding under Section 5.05(b) because he was made a party to
that proceeding after the Effective Time for actions he took as a director and officer of
Massey before the Effective Time.
The second representation comes from the following colloquy at oral argument on
the preliminary injunction motion between the Court and Alpha’s counsel:
The Court: Can – can you go over your understanding of the indemnity that your clients have granted?
[Alpha’s Counsel]: Yes. And I don’t think that this – well – yes. There are two provisions in the merger agreement that deal with indemnity. One is 5.05(a), and the second is 5.05(b). 5.05(a) is the provision that addresses causes of action existing prior to the signing of the merger agreement. There is no dispute that these derivative claims were existing prior to the merger agreement. And 5.05(a) says that the indemnity for those claims and any others presigning of the merger agreement will remain postmerger Massey’s obligation. Obviously Massey will be a subsidiary of Alpha, but it will be Massey’s indemnification. That’s my
174 JX 31 (Certain Massey Defs.’ Ans. Br. in Opp’n to Pls.’ Mot. for a Prelim. Inj.) at ANR_AAR-00000793-94.
53 view. That’s what we argued in our brief to Your Honor, and that’s what Massey argued in their brief to Your Honor at pages 42 –
The Court: So there is no indemnity from Alpha as a parent company –
[Alpha’s Counsel]: On these claims, no, no. And the two signatories to that contract agree that that is how it reads.
There is a separate provision, 5.05(b), which applies to claims threatened or brought after the signing of the merger agreement. 175
The claims for which Alpha’s counsel was denying that Alpha would have any
indemnification obligations were the derivative claims that had been asserted before the
Effective Time in the case before the Court. Nothing in this colloquy, which did not even
involve statements made by Blankenship’s counsel, contradicts the interpretation of
Section 5.05 Blankenship has advanced here. Indeed, at the end of the colloquy quoted
above, Alpha’s counsel explicitly recognized that Section 5.05(b) would apply to “claims
threatened or brought after the signing of the merger agreement.”
Finally, from my reading of the Court’s decision in Massey Energy Co., then-Vice
Chancellor Strine did not adopt an interpretation of Section 5.05(b) of the Merger
Agreement that is contrary to Blankenship’s position in this case. The reason Section
5.05 was relevant in Massey Energy Co. was because plaintiffs had argued, based on a
draft of a merger agreement Massey’s counsel had prepared, that Alpha, as a third party,
was agreeing to indemnify Massey’s management and directors beyond the extent to
175 Letter from Matthew E. Fischer at Ex. 1 (May 13, 2015). Alpha’s counsel’s reference to the “two signatories” to the Merger Agreement refers to Alpha and Massey and does not refer to Blankenship, who had retired from Massey by that time and was not a signatory to the Merger Agreement.
54 which Massey itself would have been permitted to do so under Delaware law such that,
for example, they would be indemnified for breaches of the fiduciary duty of loyalty
involving scienter. After analyzing the record, then-Vice Chancellor Strine rejected this
argument as a basis for injunctive relief because Section 5.05(b) of the final Merger
Agreement only required Alpha to indemnify Massey’s directors and officers “to the
fullest extent [Massey] would have been permitted to do so under applicable Law (for the
avoidance of doubt, subject to the limitations on [Massey’s] ability to indemnify its
directors and officers under Section 145 of the DGCL)”: 176
I have carefully considered the plaintiffs’ argument that a January 2011 draft of the Merger Agreement, written by Cravath [Massey’s counsel], supports the inference that the Board sought to sell the company to avoid personal liability for the Derivative Claims. . . . [T]he draft Cravath sent to Alpha was one that required Alpha to indemnify the Massey defendants for any claim asserted against them in their capacity as Massey directors or officers “to the fullest extent permitted by Law.” Alpha’s counsel flagged this as something that would need to be changed in any definitive merger agreement because the draft merger agreement’s indemnification provision arguably could have allowed Alpha, because it was a third-party and not Massey itself, to indemnify former Massey management and directors beyond the extent Massey itself would have been permitted under Delaware public policy and statutory law. To wit, Crutchfield’s advisors must have told him that the draft arguably could have required Alpha to indemnify Massey fiduciaries for breaches of the fiduciary duty of loyalty involving scienter, such as claims involving willful misconduct. Massey conceded this point in the negotiations, and the issue was resolved when both parties agreed to an indemnification provision that would require Alpha to indemnify the Massey directors and officers, “from and after the Effective Time,” only “to the fullest extent [Massey] would have been permitted to do so under applicable Law (for the avoidance of doubt, subject to the limitations on [Massey’s] ability to indemnify its directors and officers under Section 145 of the DGCL).” Thus, Alpha’s obligation to indemnify was expressly limited by the extent to which Massey itself could have
176 Massey Energy Co., 2011 WL 2176479 at *16 (internal quotations omitted).
55 legally indemnified the Massey directors and officers had it remained independent—limitations that precluded Massey from indemnifying its fiduciaries for derivative settlements or judgments, bad faith misconduct, or other wrongdoing involving scienter. Massey, for its part, as an Alpha subsidiary, would continue, too, to maintain its current obligations under its certificate of incorporation existing at the time of the Merger to indemnify Massey directors and officers. Massey’s certificate of incorporation already guaranteed its directors and officers legally maximal advancement and indemnification rights. Massey’s certificate also contained an exculpatory provision authorized by 8 Del. C. § 102(b)(7).
As a result, the final Merger Agreement only had Alpha provide a guarantee that Alpha would accord the Massey directors and officers with the same protection they were afforded by Massey’s certificate of incorporation. This did not immunize Massey directors or officers from liability to Massey or Alpha for non-exculpated breached of fiduciary duty that harmed Massey. 177
As the above passage makes clear, the Court did not adopt a construction of Section
5.05(b) of the Merger Agreement that contradicts the argument Blankenship has made
here, i.e., that he is entitled to advancement from Alpha for the Criminal Proceeding
under Section 5.05(b) because he was made a party to that proceeding after the Effective
Time for actions he took as a director and officer of Massey before the Effective Time.
Accordingly, Alpha’s judicial estoppel argument is without merit.
For the reasons discussed above, under the plain meaning of the unambiguous
terms of Section 5.05(b) of the Merger Agreement, Alpha is obligated to provide
advancement to Blankenship for the expenses he has incurred in the Criminal Proceeding.
177 Massey Energy Co., 2011 WL 2176479, at *16-17 (emphasis added); see also id. at *26 (“Alpha only promised to indemnify the Massey Board and management to the extent Massey itself could have and did in fact do so.”).
56 Section 5.05(b) conditions Alpha’s obligation to do so “upon receipt of any undertaking
in favor of Parent and the Surviving Corporation of a type contemplated by the Company
Certificate of Incorporation [i.e., Massey’s Charter 178].” Unsurprisingly, Alpha contests
whether Blankenship has provided an appropriate undertaking. I turn to that issue next.
E. Blankenship has provided a Valid Undertaking Entitling Him to Advancement from Alpha
In the Complaint, Blankenship sought an order “[d]eclaring that Defendants have
each breached Mr. Blankenship’s contractual rights under the Merger Agreement . . . to
advancement of attorneys’ fees and expenses regarding the [Criminal] Proceeding.”179
On February 27, 2015, after initiating this action, Blankenship delivered to Alpha the
Alpha Undertaking, which states, in its entirety:
I, Donald Blankenship, have retained counsel to represent me in connection with an investigation and indictment captioned United States v. Blankenship, No. 5:14-cr-00244, filed in the United States District Court for the Southern District of West Virginia, as well as in connection with any concurrent or other proceedings relating to (i) Performance Coal Company, Massey Energy Company (n/k/a Alpha Appalachia Holdings, Inc.) (“Massey”), Massey Coal Services, Inc.; (ii) any affiliates or parents, including Alpha Natural Resources, Inc. (“Alpha”); or (iii) employees or other persons associated with these entities. Pursuant to Section 5.05(b) of the Agreement and Plan of Merger dated as of January 28, 2011, among Mountain Merger Sub, Inc., Alpha Natural Resources, Inc., and Massey Energy Company, Alpha agreed to advance on my behalf the fees and costs associated with the representation to the fullest extent that Massey would have been permitted to do so under applicable law upon receipt of an
178 The Merger Agreement defines “Company Certificate of Incorporation” as “[t]he Amended and Restated Certificate of Incorporation of [Massey] as in effect immediately prior to the Effective Time,” which is same document defined above as the Charter. JX 26 (Merger Agreement) at § 1.05(a). 179 Compl. Prayer for Relief ¶ C.
57 undertaking in favor of Alpha of a type contemplated by the Massey Certificate of Incorporation.
As contemplated by Article Sixth of the Massey Amended and Restated Certificate of Incorporation dated June 1, 2011 . . . , I hereby make the following undertaking: if it shall ultimately be determined that I am not entitled to be indemnified under the Amended and Restated Certificate of Incorporation, consistent with [the] Delaware General Corporation Law, I agree to repay any sums that Alpha has expended on my behalf for indemnification or advancement. 180
On its face, the Alpha Undertaking is different from the Undertaking. It does not include
the Contingency Provision, any of the Undertaking’s factual representations, or the
Termination Provision.
Blankenship has requested that I order Alpha to advance his expenses for the
Criminal Proceeding under the Alpha Undertaking. 181 In opposition, Alpha argues that
Blankenship has “no contractual or other basis to unilaterally impose this new
undertaking,” contending that, under 8 Del. C. 145(e), it has “the right to impose terms
and conditions on Mr. Blankenship’s advancement” because he is a former officer and
director of Massey. 182 Blankenship counters that because Massey’s Charter does not
expressly authorize Massey to impose any terms or conditions on such advancement,
Section 5.05(b) of the Merger Agreement precludes Alpha from imposing any terms or
180 JX 48 (Alpha Undertaking). 181 Tr. of Oral Arg. 135-36; Pl.’s Reply Br. 18; Pl.’s Op. Br. 29-30. 182 Defs.’ Ans. Br. 30 n.25; Tr. of Oral Arg. 132-33.
58 conditions on his advancement “through the back door of an undertaking.” 183 I agree
with Blankenship that, under the plain language of the Merger Agreement and Massey’s
Charter, Alpha does not have the right to impose any terms or conditions on
Blankenship’s advancement other than an undertaking to repay.
As noted above, Section 5.05(b) of the Merger Agreement conditions Alpha’s
obligation to provide advancement “upon receipt of any undertaking in favor of Parent
and the Surviving Corporation of a type contemplated by [Massey’s Charter].” Article
Fifteenth of Massey’s Charter states, in relevant part:
The right to indemnification conferred in this Article shall be a contract right and shall include the right to be paid by the Corporation the expenses incurred in defending any such proceeding in advance of its final disposition; provided, however, that, if the Delaware General Corporation Law requires, the payment of such expenses incurred by a director or officer in his or her capacity as a director or officer . . . in advance of the final disposition of a proceeding, shall be made only upon delivery to the Corporation of an undertaking, by or on behalf of such director or officer, to repay all amounts so advanced if it shall ultimately be determined that such director or officer is not entitled to be indemnified under this Article or otherwise. 184
No other provision of the Charter mandates, or reserves the right for Massey to impose,
any additional terms and conditions in the undertaking that must be delivered to obtain
183 Pl.’s Op. Br. 8. Although Massey’s Charter does not expressly condition advancement to a former director or officer upon delivery of an undertaking, Blankenship cannot legitimately dispute that, were he not entitled to indemnification, he would be required to repay the advanced legal expenses. See Reddy v. Elec. Data Sys. Corp., 2002 WL 1358761, at *5 (Del. Ch. June 18, 2002). Thus, I do not view Blankenship as arguing that he was not required under the Merger Agreement to deliver the Alpha Undertaking. 184 JX 24 (Charter) at Art. Fifteenth.
59 advancement. Thus, as a matter of law based on the unambiguous words of Article
Fifteenth, 185 the only form of undertaking “of a type contemplated by” the Charter is
simply an undertaking to repay—without any additional terms or conditions.186
Accordingly, because no provision of the Charter or the Merger Agreement expressly
authorizes Alpha to demand any terms or conditions on advancement other than an
undertaking to repay, Alpha does not have the right to request anything more from
Blankenship than the Alpha Undertaking, 187 which he previously delivered. 188
Then-Vice Chancellor Strine’s analysis in Reddy v. Electronic Data Systems
Corp. 189 further supports my conclusion here. In that case, a former employee (Reddy)
185 Charters of Delaware corporations are interpreted through contract interpretation principles, and charter provisions that are reasonably susceptible to only one interpretation are afforded their “plain, ordinary meaning.” Alta Berkeley VI C.V. v. Omneon, Inc., 41 A.3d 381, 385 (Del. 2012). 186 See In re Cent. Banking Sys., Inc., 1993 WL 183692, at *4 (Del. Ch. May 11, 1993) (concluding, where the only condition imposed by a mandatory advancement bylaw was the delivery of an undertaking to repay, that the corporation lacked the authority to require “that the recipient of advance indemnification furnish appropriate security or demonstrate financial responsibility as a condition to receiving advances”). 187 See Havens v. Attar, 1997 WL 55957, at *13 (Del. Ch. Jan. 30, 1997) (“When mandatory advancement is contractually provided, however, a board may not change the terms of ‘mandatory’ advancement by later conditioning that advancement upon a showing of financial responsibility.”). 188 Although the Alpha Undertaking was not executed in favor of both Massey and Alpha as contemplated by Section 5.05(b) of the Merger Agreement, any argument challenging the Alpha Undertaking on that ground has been waived. See In re PNB Hldg. Co. S’holders Litig., 2006 WL 2403999, at *18 (Del. Ch. Aug. 18, 2006). 189 2002 WL 1358761 (Del. Ch. June 18, 2002).
60 asserted that the corporation (EDS) was required to advance his legal expenses incurred
in two pending lawsuits. EDS’s advancement bylaw provided, in relevant part, that
[e]ach person who at any time shall serve or shall have served as a Director, officer, employee or agent of the Corporation . . . shall be entitled to . . . the advancement of expenses incurred by such person from the Corporation as, and to the fullest extent, permitted by Section 145 of the DGCL[.] 190
Reddy argued he was entitled to advancement under the plain language of that bylaw
without delivering an undertaking because an undertaking was not required by 8 Del. C. §
145 for advancement to a former employee. Then-Vice Chancellor Strine agreed,
concluding that EDS was precluded under the unambiguous language of its bylaws from
requiring an undertaking or imposing any other terms and conditions on Reddy’s
mandatory right to advancement:
The General Assembly specifically amended that statutory subsection [i.e., Section 145(e)] to give corporations the flexibility to advance funds to employees and agents without an undertaking. In lieu of this required undertaking, corporations may specify by bylaw or contract the terms and conditions upon which employees and agents may receive advancement, which could include an undertaking and more onerous pre-requisites to advancement. Having been accorded the freedom to craft its bylaws as it wished, EDS cannot point to its own drafting failures as a defense to Reddy’s advancement claim, however. If it chose, EDS could have conditioned former employees’ advancement rights on an undertaking, proof of an ability to repay, or even the posting of a secured bond. But it did not do so. 191
The logic of Reddy applies with equal force here and supports my conclusion that, under
the Merger Agreement and the Charter, the only term or condition that Alpha can impose
190 Id. at *3. 191 Id. at *4.
61 on advancement to Blankenship is an undertaking to repay if it shall ultimately be
determined that he is not entitled to indemnification. Blankenship has provided such an
undertaking in the Alpha Undertaking.
F. Blankenship’s Expenses in the Criminal Proceeding are Reasonable
Massey’s Charter limits indemnification, and concomitantly limits advancement,
to expenses “reasonably incurred.” 192 The Merger Agreement similarly limits Alpha’s
advancement obligations to “reasonable attorneys’ fees and expenses.” 193 The
reasonableness of the invoices Blankenship has submitted for payment 194 was not the
subject of any inquiry at trial, and Defendants devoted only two paragraphs of their post-
trial brief to the subject. There, they argue that the summary or redacted invoices
Blankenship has submitted are insufficient to establish that the legal fees he has incurred
are reasonable. Defendants thus request that I either direct Blankenship to provide less
redacted time sheets or appoint a special master to report on the reasonableness of the
unredacted time sheets. 195 I decline Defendants’ invitation to belabor this summary
advancement proceeding for three reasons.
192 See JX 24 (Charter) at Art. Fifteenth. This is consistent with the reasonableness standard for expenses under 8 Del. C. § 145. See Citadel Hldg. Corp. v. Roven, 603 A.2d 818, 823 (Del. 1992). 193 JX 26 (Merger Agreement) at § 5.05(b). 194 See generally JX 57. 195 Defs.’ Ans. Br. 63.
62 First, Massey previously agreed to the form of invoices and to the general
parameters of Zuckerman Spaeder’s hourly rates in the Engagement Letter, which
provides that the invoices “will not contain an itemization of . . . time and expenses but
will show a summary of hours and fees” to “avoid disclosure of privileged information
and possible waiver of the attorney client privilege.” 196 Defendants have not argued or
otherwise shown that the unpaid invoices materially deviate from those agreed-upon
terms and conditions, and they accepted and paid the invoices in this form for several
years without complaint. I see no persuasive reason to depart from this course of dealing.
Second, in light of Alpha’s cooperation agreement with the U.S. government, the
practical realities of the Criminal Proceeding strongly weigh against requiring Zuckerman
Spaeder to disclose itemized invoices about the legal services performed, which may
shed light on the strategy for Blankenship’s legal defense. I agree with Blankenship that
there is a serious and unnecessary risk of prejudice to his defense in the Criminal
Proceeding should, for example, Alpha be forced to (or voluntarily) turn any itemized
invoices over to the government.
Third, employing a special master to review unredacted invoices would be an
unnecessary endeavor and inconsistent with the efficient administration of justice in this
case. “Advancement is not the proper stage for a detailed analytical review of the fees
[for which advancement is sought], whether in terms of the strategy followed or the
196 JX 21 (Engagement Letter) at DBDEL0010.
63 197 staffing and time committed.” In Fasciana v. Electronic Data Systems Corp., 198 then-
Vice Chancellor Strine explained why persnickety disputes over the reasonableness of the
attorneys’ fees sought in advancement cases are frowned upon:
[T]he function of a § 145(k) advancement case is not to inject this court as a monthly monitor of the precision and integrity of advancement requests. Unless some gross problem arises, a balance of fairness and efficiency concerns would seem to counsel deferring fights about details until a final indemnification proceeding, by which time the details may not even matter as [the person seeking advancement] may (depending on the outcome of the [underlying proceeding]) be obligated to repay all of the funds. 199
Defendants have not advanced any substantive argument that the aggregate fees that have
not been paid (approximately $5.8 million as of April 1, 2015) are unreasonable. Nor
have they identified, in my view, any “gross problem” or other legitimate reason that
would warrant injecting a special master to “perform the task of playground monitor,
refereeing needless and inefficient skirmishes in the sandbox.” 200 Disputes over the
reasonableness of Blankenship’s expenses in the Criminal Proceeding can ultimately be
resolved when any determination on indemnification is made.
197 Duthie v. CorSolutions Medical, Inc., 2008 WL 4173850, at *2 (Del. Ch. Sept. 10, 2008). 198 829 A.2d 160 (Del. Ch. 2003). 199 Id. at 177. 200 Reinhard & Kreinberg v. Dow Chem. Co., 2008 WL 868108, at *5 (Del. Ch. Mar. 28, 2008).
64 G. Blankenship is Entitled to His Reasonable Expenses Incurred in Connection with this Action.
In Count IV of the Complaint, Blankenship seeks to recover the fees he incurred
litigating this action. Massey’s Charter provides that a claimant who seeks advancement
and is “successful in whole or in part . . . shall be entitled to be paid also the expense of
prosecuting such claim.” 201 Under the Delaware Supreme Court’s decision in Stifel
Financial Corp. v. Cochran and its progeny, 202 a person who successfully prosecutes a
claim under 8 Del. C. § 145 is typically entitled to recover the reasonable expenses
incurred in connection therewith unless the corporation precludes such recovery upfront
in the governing document or contract providing for indemnification. 203 Section 5.05(a)
of the Merger Agreement provides that Massey’s indemnification obligations survive the
merger, and Section 5.05(b) provides that Alpha must indemnify Blankenship “to the
fullest extent [Massey] would have been permitted to do so under applicable Law.” 204
In this opinion, I have concluded that Blankenship is entitled to advancement from
Massey, under the Charter and Section 5.05(a) of the Merger Agreement, for all of the
fees and expenses for which he seeks advancement; and from Alpha, under Section
201 JX 24 (Charter) at Art. Fifteenth ¶ (a). 202 809 A.2d 555 (Del. 2002). 203 See id. at 561; see also Brady v. i2 Techs. Inc., 2005 WL 3691286, at *4 (Del. Ch. Dec. 14, 2005) (awarding “fees on fees” for a successful claim for advancement under Section 145); Weaver v. ZeniMax Media, Inc., 2004 WL 243163, at *7 (Del. Ch. Jan. 30, 2004) (“Under Stifel Financial, if a corporation does not want to incur the obligation to pay ‘fees on fees,’ it must expressly preclude any such right.”). 204 JX 26 (Merger Agreement) at §§ 5.05(a)-(b).
65 5.05(b) of the Merger Agreement, for all of the fees and expenses incurred in the
Criminal Proceeding. Although Blankenship did not prevail on his alternative claim in
Count II based on the terms of the Engagement Letter, he has been “successful in whole”
in my view in obtaining the relief sought in the Complaint. Accordingly, I find that
Blankenship is entitled to all his reasonable expenses incurred in litigating this action
from Massey and Alpha. 205
IV. CONCLUSION
For the foregoing reasons, judgment will be entered in Blankenship’s favor on
Counts I, III and IV of the Complaint and in Defendants’ favor on Count II. Defendants
must (1) advance Blankenship’s unpaid legal expenses incurred in connection with the
federal criminal investigation and the Criminal Proceeding and (2) pay his reasonable
expenses of litigating this action. Counsel shall confer and submit an implementing order
within five business days, providing for the foregoing payments to be made within ten
business days of entry of judgment.
205 See, e.g., Holley v. Nipro Diagnostics, Inc., 2014 WL 7336411, at *15 (Del. Ch. Dec. 23, 2014) (awarding 100% of the plaintiff’s legal expenses incurred in successfully prosecuting claims for advancement).
Related
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