COURT OF CHANCERY OF THE STATE OF DELAWARE
D ONALD F. PARSONS, JR. New Castle County Courthouse VICE CHANCELLOR 500 N. King Street, Suite 11400 Wilmington, Delaware 19801-3734
Date Submitted: June 24, 2015 Date Decided: October 22, 2015
Raymond J. DiCamillo, Esq. John L. Reed, Esq. Susan M. Hannigan, Esq. Scott Czerwonka, Esq. J. Scott Pritchard, Esq. Harrison S. Carpenter, Esq. Rachel E. Horn, Esq. DLA Piper LLP Richards, Layton & Finger, P.A. 919 North Market Street, 15th Floor 920 North King Street Wilmington, DE 19801-3046 Wilmington, DE 19801
Re: In re Genelux Corporation Civil Action No. 10612-VCP
Dear Counsel:
This is an advancement proceeding based on related litigation before this
Court under 8 Del. C. §§ 205 and 225 (the “205/225 Action”) and an action in
California. The detailed background of the underlying dispute in the 205/225
Action is set out more fully in the opinion issued contemporaneous with this Letter
Opinion, reflecting this Court‟s post-trial findings of fact and conclusions of law in
that action.1 This opinion addresses whether a former director and officer of a
1 In re Genelux Corp., C.A. No. 10042-VCP (Del. Ch. 2015) [hereinafter 205/225 Opinion]. In re Genelux Corporation Civil Action No. 10612-VCP October 22, 2015 Page 2
corporation is entitled to summary judgment on his request for advancement of
fees and expenses incurred in the related 205/225 Action and the California
litigation from the corporation. For the reasons set forth below, I conclude the
former director and officer is entitled to advancement, and I grant the motion for
summary judgment.
I. BACKGROUND
A. Facts On August 20, 2014, Genelux Corporation (“Genelux” or the “Company”),
together with Dr. Ron Simus, a Genelux Board member and stockholder, filed an
amended complaint against Dr. Albert Roeder and Byron Georgiou containing two
counts, seeking: (1) relief pursuant to 8 Del. C. § 205; and (2) relief pursuant to
8 Del. C. § 225. On October 13, 2014, Leslie Busick, trustee of the Busick Inter
Vivos Trust dated June 11, 1974, filed a complaint in California state court against
Dr. Aladar Szalay, among other defendants, seeking restitution based on a
$2,000,000 loan that Busick had made to Genelux (the “California Action”). On
October 31, 2014, Szalay moved to intervene in the 205/225 Action, which relates,
among other things, to the validity of 1.5 million shares of Series A Preferred
Stock in the Company that Szalay purportedly received in 2009. On November 21,
2014, Szalay submitted a request for indemnification and advancement to Genelux In re Genelux Corporation Civil Action No. 10612-VCP October 22, 2015 Page 3
pursuant to Article XI of the Company‟s First Amended and Restated Bylaws,
which provides:
Each person who was or is made a party or is threatened to be made a party 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, or a person of whom he or she is the legal representative, is or was a director or officer, of the Corporation . . . whether the basis of such proceeding is alleged action in an official capacity as a director, officer, employee or agent or in any other capacity while, serving as a director, officer, employee or agent, 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, judgments, fines, ERISA excise taxes or penalties and amounts paid or to be paid in settlement) 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, officer, employee or agent . . . provided, however, that, except as provided in paragraph (b) hereof, the Corporation shall indemnify any such person seeking indemnification in connection with a proceeding (or part thereof) initiated by such person only if such proceeding (or part thereof) was authorized by the Board of Directors of the Corporation. The right to indemnification conferred in this Section 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 (and not in any other capacity in which service was or is rendered by such person In re Genelux Corporation Civil Action No. 10612-VCP October 22, 2015 Page 4
while a director or officer, including, without limitation, service to an employee benefit plan) 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 Section or otherwise.2
Szalay also seeks advancement pursuant to Section 5 of the indemnification
agreement dated July 25, 2011 between the Company and Szalay (the
“Indemnification Agreement”), which provides:
Notwithstanding any other provision of this Agreement, the Company shall advance all Expenses incurred by or on behalf of Indemnitee in connection with any Proceeding by reason of Indemnitee‟s Corporate Status within thirty (30) days after the receipt by the Company of a statement or statements from Indemnitee requesting such advance or advances from time to time, whether prior to or after final disposition of such Proceeding. Such statement or statements shall reasonably evidence the Expenses incurred by Indemnitee and shall include or be preceded or accompanied by a written undertaking by or on behalf of Indemnitee to repay any Expenses advanced if it shall ultimately be determined that Indemnitee is not entitled to be indemnified against such Expenses. Any advances and undertakings to repay pursuant to this Section 5 shall be unsecured and interest free. . . .3
2 Compl. Ex. B, Art. XI § 1(a). 3 Compl. Ex. C § 5. In re Genelux Corporation Civil Action No. 10612-VCP October 22, 2015 Page 5
On February 5, 2015, Szalay filed this action after the Company refused to
advance his expenses and also moved for expedited treatment thereof (the “Motion
to Expedite”). On February 18, 2015, the Company moved to consolidate this
action with the 205/225 Action (the “Motion to Consolidate”). On February 24,
2015, Szalay submitted to the Company evidence of his expenses and the written
undertaking as required to make a demand for advancement under Section 5 of the
Indemnification Agreement. On February 26, 2015, Szalay moved for summary
judgment of advancement and filed an opening brief in support thereof (the
“Motion for Summary Judgment”). On April 2, 2015, I granted in part and denied
in part the Motion to Consolidate and the Motion to Expedite. Those motions were
granted only to the extent that I ordered that: (1) the parties could present
additional evidence regarding Szalay‟s Motion for Summary Judgment at trial; and
(2) briefing on the Motion for Summary Judgment could proceed promptly. Trial
on the issues presented in the 205/225 Action and any additional evidence on
Szalay‟s Motion for Summary Judgment was held April 7-8, 2015. On April 20,
2015, Genelux filed its brief in opposition to Szalay‟s Motion for Summary
Judgment, and on April 27, Szalay submitted his reply brief. On June 24, 2015, I
heard post-trial argument on all issues. Having considered all of the recited In re Genelux Corporation Civil Action No. 10612-VCP October 22, 2015 Page 6
submissions and observed the relevant portions of the trial and post-trial
arguments, I present my ruling on the Motion for Summary Judgment in this Letter
Opinion.
B. Parties’ Contentions Defendant Genelux asserts that Szalay is not entitled to advancement under
the Company‟s governing documents and Delaware law, because: (1) Szalay
intervened in the 205/225 Action for personal reasons and not as part of any duty
to the Company or its stockholders; (2) Szalay was not involved in the 205/225
Action by reason of his Corporate Status, as defined in the Indemnification
Agreement and referenced in Section 13(a); (3) the Company‟s Director and
Officer (“D&O”) insurer agreed to cover his attorneys‟ fees incurred in the
California Action; therefore, any of Szalay‟s claims related to advancement for that
action are moot; and (4) Szalay failed to comply with Section 5 of the
Indemnification Agreement, because he did not submit the requisite evidence of
expenses and a written undertaking with, or before submitting, his demand for
advancement.4
4 See Genelux Corp.‟s Ans. Br. in Opp. to Pl.‟s Mot. Summ. J. (“Def.‟s Ans. Br.”), Docket Item (“D.I.”) 17. In re Genelux Corporation Civil Action No. 10612-VCP October 22, 2015 Page 7
Szalay argues that he is entitled to advancement of the legal fees and
expenses he has incurred and continues to incur in the 205/225 Action, because his
involvement relates to his “Corporate Status.”5 In addition, Szalay contends that
the fact that he was forced to intervene in the 205/225 Action does not extinguish
his advancement rights.6 Further, Szalay claims that he still may be entitled to
advancement for fees incurred in the California Action beyond any
reimbursements received pursuant to the Company‟s D&O insurance.7 I address
each of these arguments in turn, below.
II. ANALYSIS
A. Szalay’s Failure to Get Board Authorization Does Not Extinguish His Advancement Rights Genelux first claims that Szalay is not entitled to advancement, because he
intervened in the 205/225 Action for purely personal reasons. 8 Section 13(f) of
the Indemnification Agreement defines a “Proceeding” as:
any threatened, pending or completed action, suit, arbitration, alternate dispute resolution mechanism, investigation, inquiry, administrative hearing or any other
5 Pl.‟s Reply Br. in Supp. of Mot. Summ. J. (“Pl.‟s Reply Br.”), D.I. 20, at 6. 6 Id. at 14. 7 Id. at 21. 8 Def.‟s Ans. Br. 9. In re Genelux Corporation Civil Action No. 10612-VCP October 22, 2015 Page 8
actual, threatened or completed proceeding, whether brought by or in the right of the Company or otherwise and whether civil, criminal, administrative or investigative, in which Indemnitee was, is or will be involved as a party or otherwise, by reason of his or her Corporate Status, by reason of any action taken by him or her or of any inaction on his or her part while acting in his or her Corporate Status; in each case whether or not he or she is acting or serving in any such capacity at the time any liability or expense is incurred for which indemnification can be provided under this Agreement; including one pending on or before the date of this Agreement, but excluding one initiated by an Indemnitee pursuant to Section 7 of this Agreement to enforce his or her rights under this Agreement.9
The Delaware Supreme Court broadly has interpreted the language “party
or otherwise” to include “an individual who acts as an intervenor or amicus
curiae in any particular case.” 10 Thus, Szalay‟s right to advancement under the
Indemnification Agreement is not extinguished by virtue of his status as an
intervenor.
Genelux also contends that Szalay is not entitled to advancement based on
his status as an intervenor, because he initiated his involvement in the 205/225
Action without authorization from the Genelux board of directors, contrary to
9 Compl. Ex. C § 13(f) (emphasis added). 10 Hibbert v. Hollywood Park, Inc., 457 A.2d 339, 343 (Del. 1983). In re Genelux Corporation Civil Action No. 10612-VCP October 22, 2015 Page 9
Section 9(c) of the Indemnification Agreement. 11 Section 9 provides in relevant
part:
Notwithstanding any provision in this Agreement, the Company shall not be obligated under this Agreement to make any indemnity in connection with any claim made against Indemnitee: . . . (c) in connection with any Proceeding (or any part of any Proceeding) initiated by Indemnitee, including any Proceeding (or any part of any Proceeding) initiated by Indemnitee against the Company or its directors, officers, employees or other indemnitees, unless (i) the Board authorized the Proceeding (or any part of any Proceeding) prior to its initiation or (ii) the Company provides the indemnification, in its sole discretion, pursuant to the powers vested in the Company under applicable law.12
Although I am not aware of any Delaware case that squarely examines board
authorization as a limitation on advancement rights under an indemnification
agreement of a party that successfully intervenes in an action without asserting
affirmative claims, Delaware courts have examined the advancement rights of a
party that: (1) initiates a suit against the corporation; and (2) asserts a compulsory
counterclaim in a suit brought against it. Specifically, Delaware courts recognize
that “permissible indemnification claims will include those deriving from lawsuits
brought by directors . . . only insofar as the suit was brought as part of the 11 Def.‟s Ans. Br. 10-11. 12 Compl. Ex. C § 9(c) (emphasis added). In re Genelux Corporation Civil Action No. 10612-VCP October 22, 2015 Page 10
employee’s duties to the corporation and its shareholders.”13 In addition,
Delaware courts recognize a counterclaim as a “defense” within the meaning of an
express indemnification agreement that authorizes advancement for indemnitees
who are required to defend an action, if the counterclaim is “(1) „necessarily part of
the same dispute,‟ in the sense that it qualifies as a compulsory counterclaim under
the prevailing Delaware and federal procedural standard, and (2) [is] „advanced to
defeat, or offset‟ the affirmative claims.”14
Szalay‟s intervention in the 205/225 Action cannot fairly be said to have
been carried out exclusive of, or entirely outside of, his “duties to the corporation
and its shareholders,”15 because Genelux sought to invalidate certain resolutions
previously passed by the board of directors effectively confirming that Szalay had
13 Shearin v. E.F. Hutton Gp., Inc., 652 A.2d 578, 594 (Del. Ch. 1994) (citing Hibbert v. Hollywood Park, 457 A.2d at 344). 14 Pontone v. Milso Indus. Corp., 100 A.3d 1023, 1054-55 (Del. Ch. 2014) (citing Citadel Hldg. Corp. v. Roven, 603 A.2d 818, 824 (Del. 1992)). 15 See Gentile v. SinglePoint Fin., Inc., 787 A.2d 102, 107-09 (Del. Ch. 2001) (A former officer and director sought advancement from the corporation as to his attempted intervention in the corporation‟s lawsuit against the corporation‟s client and as to his initiation of a lawsuit against the corporation to recover certain stock of the corporation‟s client. The court held he was not entitled to advancement under the Shearin/Hibbert analysis, because he was not a defendant in the underlying actions and merely was asserting personal property rights in his action against the corporation.) In re Genelux Corporation Civil Action No. 10612-VCP October 22, 2015 Page 11
the right, as a stockholder of 3 million Series A Preferred shares, to elect two
directors to the board. Szalay, then, did not “plainly [seek] to advance [his] own
interest” exclusive of the “interest of the corporation” by intervening to defend the
validity of those resolutions.16 Further, Szalay‟s intervention in the 205/225
Action is akin to a compulsory counterclaim in that it was “necessarily part of the
same dispute.” Specifically, were the Court to rule in favor of Genelux in the
205/225 Action, Szalay could be barred on collateral estoppel grounds from
arguing that he had discharged his fiduciary duties properly in connection with the
challenged actions.17
Genelux and Simus named only Roeder and Georgiou, the directors elected
by Szalay, as defendants in the 205/225 Action. Not surprisingly, neither of those
defendants were inclined to expend personally the potentially substantial resources
that would be required to defend that action. The party whose interests were most
16 See Shearin, 652 A.2d at 594 (refusing a director‟s request for advancement for fees incurred in lawsuits she initiated against the corporation, alleging defamation and breach of employment contract, because she merely asserted personal rights). 17 Op. Br. in Supp. of Pl.‟s Mot. Summ. J., D.I. 12, at 28. See also Gentile, 787 A.2d at 110 (The former director‟s intervention in the corporation‟s action against its client was not the same as a compulsory counterclaim under Citadel, because the director “was not faced with a „use-it-or-lose-it‟ scenario . . .”). In re Genelux Corporation Civil Action No. 10612-VCP October 22, 2015 Page 12
threatened was Szalay. The Company, however, did not name him as a defendant.
Szalay asserts that was done to deny him his advancement rights, among other
things. Whatever Genelux‟s motivations, I conclude that it would be inequitable to
deny Szalay his claimed right to advancement under the Indemnification
Agreement based on his failure to get board authorization to intervene in the
205/225 Action. To hold otherwise would allow the Company to allege
misconduct of a director in his capacity as a fiduciary and to attempt to invalidate
his personal property rights and related corporate rights without naming him a
defendant, thereby forcing him either to intervene in the action at his own expense
or risk losing important rights.
B. Szalay Was Involved in the 205/225 Action by Reason of His Corporate Status Genelux next asserts that Szalay is not entitled to advancement pursuant to
Section 5 of the Indemnification Agreement, because he intervened in the 205/225
Action on the basis of his interest as a stockholder and was not involved in that
action by reason of his Corporate Status.18 The “by reason of” limitation in
Section 5 is consistent with the statutory language in Section 145(a) of the
18 Section 13(a) of the Indemnification Agreement defines “Corporate Status” to include “the status of a person who is or was a director, officer, employee, agent or fiduciary of the Company.” Compl. Ex. C § 13(a). In re Genelux Corporation Civil Action No. 10612-VCP October 22, 2015 Page 13
Delaware General Corporation Law (“DGCL”), which authorizes indemnification
when a person is made or threatened to be made a party to an action or proceeding
“by reason of the fact” that the person is or was a director or officer. 19 Under
Delaware law, “[t]he „by reason of the fact‟ standard, or the „official capacity‟
standard, is interpreted broadly and in favor of indemnification and
advancement.”20 As the Delaware Supreme Court held in Homestore, Inc. v.
Tafeen, “if there is a nexus or causal connection between any of the underlying
proceedings . . . and one‟s official corporate capacity, those proceedings are „by
reason of the fact‟ that one was a corporate officer, without regard to one‟s
motivation for engaging in that conduct.”21 The requisite connection is established
“if the corporate powers were used or necessary for the commission of the alleged
misconduct.”22
Szalay was involved in the 205/225 Action not merely as a putative holder
of the 1.5 million shares of Series A Preferred Stock Genelux sought to invalidate, 19 8 Del. C. 145(a). 20 Underbrink v. Warrior Energy Servs. Corp., 2008 WL 2262316, at *7 (Del. Ch. May 30, 2008) (citing Weaver v. ZeniMax Media, Inc., 2004 WL 243163 (Del. Ch. Jan. 30, 2007)). 21 888 A.2d 204, 214 (Del. 2005). 22 Bernstein v. TractManager, Inc., 953 A.2d 1003, 1011 (Del. Ch. 2007). In re Genelux Corporation Civil Action No. 10612-VCP October 22, 2015 Page 14
but also by reason of his Corporate Status. Genelux alleged in its Verified Petition
for Relief that the 1.5 million shares were “improperly issued” to Szalay by reason
of his alleged wrongdoing in his capacity as CEO, President, and Chairman of the
Board.23 Virtually all of the relevant facts and allegations of the 205/225 Action
pertain to Szalay‟s actions in his capacity as a director of Genelux; therefore, I
conclude that Szalay meets the requirements for advancement of fees incurred in
the 205/225 Action in that he is involved in that action by reason of his Corporate
Status.
C. Szalay Is Entitled to Advancement for Fees in the California Action to the Extent They Reasonably Exceed the Reimbursements from the D&O Insurance Genelux argues that Szalay‟s claims related to advancement for fees
incurred in the California Action are moot, because the Company‟s D&O
insurance provider has agreed to cover those fees.24 The fact that Szalay‟s fees and
expenses in the California Action may be covered under the Company‟s insurance
policy is irrelevant to Szalay‟s entitlement to advancement for those fees under
Delaware law and the Indemnification Agreement. This Court has recognized an
23 205/225 Op. 34. 24 Def.‟s Ans. Br. 2 n.1. In re Genelux Corporation Civil Action No. 10612-VCP October 22, 2015 Page 15
indemnitee‟s ability to seek advancement and indemnification from multiple
sources with which it has contractual rights to do so.25 Szalay‟s advancement
rights are limited in the sense that he may not seek double recovery, but Szalay has
represented to the Court that he is not seeking to recover any amounts already
reimbursed by the insurance carrier. Szalay contends, however, that the insurance
policy has a $3 million limit, and the insurer has imposed a cap on the hourly rates
of Szalay‟s counsel such that he will not be reimbursed fully by the insurer for the
fees and expenses incurred in the California Action. Szalay would be entitled,
therefore, to seek advancement from Genelux for reasonable fees and expenses he
incurred in the California Action that are not paid by the D&O insurer.
D. Szalay Properly Made a Demand for Advancement Section 5 of the Indemnification Agreement requires the party‟s request for
advancement to be accompanied or preceded by evidence of expenses and a
written undertaking on behalf of the party to repay any expenses advanced if it is
determined he is not entitled to be indemnified. The Company then has thirty
days to advance payment for those expenses. 26 In this case, Szalay requested
advancement from Genelux on November 21, 2015, but he did not submit the
25 See Pontone v. Milso Indus. Corp., 100 A.2d 1023, 1040 (Del. Ch. 2014). 26 Compl. Ex. C § 5. In re Genelux Corporation Civil Action No. 10612-VCP October 22, 2015 Page 16
requisite documentation and undertaking until February 24, 2015. Genelux
argues, therefore, that “even if the Court finds that Dr. Szalay is entitled to
advancement, there remain triable issues concerning his failure to comply with
the Indemnification Agreement before initiating this lawsuit and the
reasonableness of the fees for which Szalay has requested advancement.” 27
I do not find Genelux‟s argument persuasive. Because this action relates
to the somewhat expedited 205/225 Action and has been expedited itself, in part,
I conclude that it would exalt form over substance to dismiss this action based on
the fact that it was filed before Szalay submitted evidence of his expenses and a
written undertaking. The Company‟s contention regarding the reasonableness of
the requested fees is premature, because that issue is not currently before me. In
a separate order entered today in this action, I prescribe the procedure to be used
for seeking payment for amounts as to which advancement is sought. That
procedure includes steps relating to a reasonableness review.
Finally, as a consequence of the timing of Szalay‟s submissions regarding
his advancement claims, I deem February 24, 2015 to be the effective date of his
request for advancement based on the expenses for which he submitted
documentation by that time. The earliest date a payment would have been due on
that request would be thirty days later or March 26, 2015.
27 Def.‟s Ans. Br. 8 n.3. In re Genelux Corporation Civil Action No. 10612-VCP October 22, 2015 Page 17
E. Fees on Fees In addition to advancement for fees and expenses incurred in the 205/225
and California Actions, Szalay also seeks his reasonable attorneys‟ fees and
expenses incurred in this proceeding. This Court awards fees on fees when a
plaintiff successfully shows an entitlement to advancement that wrongfully was
withheld by the defendant corporation. Moreover, “[p]ursuant to [8 Del. C.
§ 145] . . . this Court „will only award that amount of fees that is reasonable in
relation to the results obtained.‟” 28
Szalay successfully has argued for a summary judgment that he is entitled to
advancement; therefore, I award him the entirety of his fees on fees reasonably
incurred in the prosecution of this case to date.
III. CONCLUSION For the reasons stated in this Letter Opinion, I grant Szalay‟s Motion for
Summary Judgment that he is entitled to advancement from Genelux as to the
205/225 Action and the California Action. 29
28 Holley v. Nipro Diagnostics, Inc., 2014 WL 7336411, at *15 (Del. Ch. Dec. 23, 2014) (quoting Pontone, 100 A.3d at 1176). 29 A separate Order Establishing Procedure for Payment of Advancement is being entered concurrently with this Letter Opinion. In re Genelux Corporation Civil Action No. 10612-VCP October 22, 2015 Page 18
IT IS SO ORDERED.
Sincerely,
/s/ Donald F. Parsons, Jr.
Donald F. Parsons, Jr. Vice Chancellor
DFP/ptp