IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
JOEL Z. HYATT and ALBERT A. ) GORE, JR., ) ) Plaintiffs, ) ) v. ) C.A. No. 11465-VCG ) AL JAZEERA AMERICA HOLDINGS ) II, LLC and AL JAZEERA ) INTERNATIONAL (USA) INC., ) ) Defendants. )
MEMORANDUM OPINION
Date Submitted: December 15, 2015 Date Decided: March 31, 2016
Gregory V. Varallo, Rudolf Koch, and Kevin M. Gallagher, of RICHARDS, LAYTON & FINGER, P.A., Wilmington, DE, Attorneys for the Plaintiffs.
John L. Reed, of DLA PIPER LLP (US), Wilmington, DE; OF COUNSEL: Andrew L. Deutsch, of DLA PIPER LLP (US), New York, NY, Attorneys for the Defendants.
GLASSCOCK, Vice Chancellor Advancement cases in this Court tend to follow a familiar pattern. An
employer offers a prospective employee an incentive: a right to advancement for
litigation costs arising from her employment, even where that litigation is brought
by the hiring entity itself. Later, the employer has reason to sue the employee. The
employee seeks to exercise her right to advancement, and a kind of “hirer’s remorse”
sets in with the employer, which objects to funding both sides of the litigation. The
employer therefore resists advancement, leading to litigation of the advancement
right before this Court.
The matter before me here involves a twist on this pattern. The employees
are former directors and a former officer of Current Media, LLC and have
advancement rights via the company’s operating agreement with respect to litigation
arising out of that status. The entity resisting advancement, however, is not the
former employer—Current—but the acquirer of that entity, Al Jazeera International
(USA) Inc., and its related companies. Al Jazeera’s obligations arise only indirectly
from Current’s operating agreement. In the merger agreement by which Al Jazeera
acquired Current, however, it agreed to honor those advancement obligations to the
extent Current would have been so obligated.
In a separate underlying action, the employees, Joel Hyatt and Albert Gore,
Jr., sued Al Jazeera not as former employees of Current but as members’
representative and member of Current, seeking the release, to the former members
1 of Current, of money in an escrow fund created pursuant to the merger. The parties
concede that those allegations did not trigger any advancement rights in favor of
Hyatt and Gore. Al Jazeera, however, counterclaimed. It argued in part that Hyatt
breached the Merger Agreement by denying the release of the funds in escrow, and
that its claims to those funds is valid because Current had breached representations
and warranties in the merger agreement leading to liability on the part of Al Jazeera.
The underlying allegations of breaches of representations and warranties depend
upon Al Jazeera’s contention that Hyatt and Gore, as directors and officers of
Current, had caused Current to breach so-called “most favored nation” clauses in
contracts between Current and third parties.1 Thus, the counterclaim results in the
following scenario: Hyatt and Gore have a financial interest in appearing and
defending their actions as officers and directors of Current who directed its dealings
with third parties, because without such defense their right to funds in escrow (as
well as the rights of other former members) will be forfeited. Under such a scenario,
are Hyatt’s and Gore’s rights to advancement, as provided in Current’s operating
agreement and as assumed by Al Jazeera, triggered?
I conclude that the answer to that question is yes as to the majority of Al
Jazeera’s counterclaims. My reasoning follows.
1 For a brief explanation of “most favored nation” clauses, see infra note 54.
2 I. BACKGROUND
A. The Merger
Plaintiff Joel Z. Hyatt is a former member and director of Current Media, LLC
(“Current”) and its former CEO.2 Plaintiff Albert A. Gore, Jr. is Current’s former
executive chairman and a former member.3 In December 2012, Current and
Defendant Al Jazeera International (USA) Inc. (“Al Jazeera”) entered into the
Agreement and Plan of Merger (the “Merger Agreement”) whereby Current became
a wholly owned subsidiary of Al Jazeera (the “Merger”).4 Hyatt and Gore resigned
from their positions with Current prior to the closing of the Merger, which occurred
in January 2013. Hyatt, however, was appointed Members’ Representative in the
Merger Agreement, which required him to fulfill certain duties and responsibilities
in accordance with the Merger Agreement.5
2 Verified Amended and Supplemented Complaint (“Compl.”) ¶ 8. 3 Id. at ¶ 9. 4 Transmittal Aff. of Scott B. Czerwonka, Esq. in Supp. of Defs.’ Opening Br. in Supp. of Mot. for Summ. J., Ex. A (“Merger Agreement”). The Merger Agreement, dated December 5, 2012, was entered into by Al Jazeera International (USA) Inc., Current Media, LLC, and Cardinal Merger Sub, LLC. Id. at 1. Current, according to the Plaintiffs, is a wholly owned subsidiary of Al Jazeera International (USA), Inc. and its name is now Al Jazeera America Holdings II, LLC (“AJII”)—a named Defendant here. Compl. ¶ 11. According to the Defendants, Al Jazeera I, Inc. (“AJI”) is the Al Jazeera affiliate that holds the rights and obligations under the Merger Agreement. Defs.’ Opening Br. in Supp. of Mot. for Summ. J. (“Defs’ Opening Br.”) 7. The Defendants assert that the Plaintiffs wrongly name Al Jazeera International (USA) Inc. as a party to this action. Id. at 7 n.1. Accordingly, the Defendants refer to AJI and AJII collectively as Defendant “Al Jazeera” throughout its briefing. Id. at 7. To the extent the parties disagree that the appropriate Al Jazeera entities are named in this action, that issue has not been argued or briefed. For the purposes of this Memorandum Opinion, I refer to all of the relevant Al Jazeera entities as “Al Jazeera” and need not specifically determine which Al Jazeera entity is the appropriate defendant. 5 Merger Agreement § 9.1.
3 Pursuant to the Merger Agreement, a portion of the proceeds from the Merger
were set aside to establish a General Indemnity Escrow Account (the “Escrow
Fund”) for purposes of satisfying damages associated with Current and suffered by
Al Jazeera post-Merger.6 The Merger Agreement describes the mechanism by which
Al Jazeera can seek indemnification for those damages from the Escrow Fund. First,
Al Jazeera is required to provide written notice—referred to as a “claim
certificate”—to the Members’ Representative,7 who may contest the validity of the
claim.8 If Al Jazeera and the Members’ Representative are unable to resolve the
latter’s objection, either party may bring an action in the courts of Delaware.9
Eighteen months following the close of the Merger, Current’s former members are
entitled to their pro-rata share of the residual balance in the Escrow Fund.10
The Merger Agreement also provides that for a period of six years after the
Merger, Al Jazeera agrees to indemnify and advance fees and expenses to Current’s
former officers and directors to the same extent such persons were indemnified by
Current’s Second Amended and Restated Operating Agreement, dated January 13,
2012 (the “Operating Agreement”).11
6 Id. at §§ 2.2, 8.3. 7 Id. at § 8.8. 8 Id. at § 8.9. 9 Id. 10 Id. at § 8.7. 11 Id. at § 6.9; Transmittal Aff. of Christopher H. Lyons in Supp. of Pls.’ Mot. for Partial Summ. J., Ex. 2 (“Operating Agreement”).
4 B. The Underlying Action
Following the close of the Merger, Al Jazeera served five claim certificates
(the “Claim Certificates”) on Hyatt as Members’ Representative, demanding
indemnification for several claims, including damages arising from alleged breaches
by Current of representations and warranties in the Merger Agreement. In many of
the Claim Certificates, Al Jazeera alleges that Current, at the time of the Merger
Agreement, had breached the most-favored-nations (“MFN”) provisions in three of
its distributor agreements, but that Current had represented in the Merger Agreement
that it was in compliance with its MFN provisions. Upon receiving the Claim
Certificates, Hyatt, as Members’ Representative, rejected the claims.
On August 15, 2014, Hyatt and Gore initiated an action in this Court (the
“Underlying Action”),12 contending in large part that Al Jazeera’s Claim Certificates
are improper and thus represent a breach of the Merger Agreement. In relief, Hyatt
and Gore13 seek invalidation of the Claim Certificates and an award for the balance
of the Escrow Fund. On September 11, 2014, Al Jazeera14 filed counterclaims in the
12 Gore v. Al Jazeera Am. Holdings, I, C.A. No. 10040-VCG (Del. Ch.). 13 It is unclear as to why Gore is named as a plaintiff in the Underlying Action. 14 In the Underlying Action, Hyatt and Gore filed suit against Al Jazeera America Holdings I, Inc.—the Al Jazeera entity I refer to as “AJI”—which entity the Defendants assert holds the rights and obligations arising from the Merger Agreement. See supra note 4. I note that AJI is not a party to this action. However, as I’ve already stated, I refer to all of the Al Jazeera entities collectively for purposes of this opinion and similarly do so when referring here to the defendant in the Underlying Action.
5 Underlying Action (the “Counterclaims”)15 arguing that Hyatt breached the Merger
Agreement by rejecting the Claim Certificates, which Claim Certificates, it asserts,
are valid and should be upheld pursuant to the Merger Agreement. In relief, Al
Jazeera seeks (1) an order suspending distribution of the balance of the Escrow Fund
pending resolution of the Underlying Action; (2) an order directing the
counterclaim-defendants—Hyatt and Gore—to indemnify Al Jazeera for the
damages requested in the Claim Certificates; (3) compensatory damages for injuries
suffered as a result of Hyatt’s and Gore’s alleged breaches of contract; and (4)
attorneys’ fees and costs. The Underlying Action remains pending as of the date of
this Memorandum Opinion.
C. This Advancement Action
The Plaintiffs filed their Verified Amended and Supplemental Complaint (the
“Complaint”) on October 1, 2015, alleging four counts for advancement and one
count for fees and expenses incurred in pursuit of litigating its advancement
claims—the latter of which, I note, is commonly referred to as “fees on fees.”
Shortly thereafter, the parties entered into a confidential settlement agreement,
pursuant to which the parties agreed to dismiss three of the four counts seeking
15 Gore v. Al Jazeera Am. Holdings, I, C.A. No. 10040-VCG (Del. Ch. Sept. 11, 2014) (ANSWER AND COUNTERCLAIM) (“Counterclaims ¶ __”).
6 advancement,16 leaving before me a single count for advancement (Count Four) and
a related count for “fees on fees” (Count Five).
In Count Four, the Plaintiffs allege that under the terms of the Merger
Agreement and Current’s Operating Agreement, Hyatt and Gore are entitled to
advancement of the litigation costs associated with defending the Counterclaims in
the Underlying Action. Pursuant to Count Four, the Plaintiffs seek an order (1)
declaring that Hyatt and Gore are entitled to advancement for the Counterclaims
raised in the Underlying Action; (2) declaring that Current and Al Jazeera are liable
to Hyatt and Gore for advancement for their defense of the Counterclaims in the
Underlying Action; and (3) ordering Current and Al Jazeera to pay Hyatt and Gore
their fees and expenses for defending against the Counterclaims raised in the
Underlying Action—totaling $1,731,285.99 at the time of the Complaint—plus pre-
and post-judgment interest. In Count Five, the Plaintiffs allege that they are entitled
to “fees on fees” for the fees and expenses associated with prosecuting this action.
All parties moved for summary judgment on the issue of the Plaintiffs’
entitlement to, and the Defendants’ liability for, advancement. The parties have
requested that I only address the issue of liability.17 I honor that request in this
Memorandum Opinion. The parties have agreed to confer on a procedure to address
16 See Hyatt v. Al Jazeera Am. Holdings II, LLC, C.A. No. 11465-VCG (Del. Ch. Jan. 15, 2016) (ORDER). 17 Opening Br. in Supp. of Pls.’ Mot. for Partial Summ J. (“Pls’ Opening Br.”) 4.
7 the reasonableness of the requested fees and expenses, if necessary, after the
resolution of the cross-motions for summary judgment.18
I heard oral argument on the cross-motions on November 24, 2015. At oral
argument, the Defendants clarified that, in spite of its Counterclaims in the
Underlying Action, which are drafted to seek to impose liability on Hyatt and Gore
personally, they do not seek relief beyond the balance of the Escrow Fund.19 Al
Jazeera is now judicially estopped from contending otherwise, and I consider the
Counterclaims amended accordingly. Shortly after oral argument, I asked the parties
for supplemental briefing, which is complete.20 This is my Memorandum Opinion.
II. STANDARD OF REVIEW
Summary judgment shall be granted when the moving party shows that there
is “no genuine issue as to any material fact and that the moving party is entitled to a
judgment as a matter of law.”21 “[A]dvancement proceedings are by statute
summary proceedings and . . . summary judgment practice is an efficient and
appropriate method to expeditiously resolve advancement disputes.”22 Where, as is
18 Id. at 4 n.1. 19 Oral Argument Tr. 6:12–15 (“COURT: Do the counterclaims in the underlying suit seek to recover beyond the escrow account? MR. REED: They do not.”). 20 Following oral argument, I asked the parties to submit supplemental letter memoranda on whether Section 9.5 of the Merger Agreement is relevant to the issue of advancement. 21 Ct. Ch. R. 56(c). 22 Sun-Times Media Grp., Inc. v. Black, 954 A.2d 380, 388 (Del. Ch. 2008) (citations omitted); see also Senior Tour Players 207 Mgmt. Co. LLC v. Golftown 207 Holding Co., LLC, 853 A.2d 124, 126–27 (Del. Ch. 2004) (“Summary judgment is an appropriate way to resolve advancement disputes because ‘the relevant question turns on the application of the terms of the corporate
8 the case here, the parties file cross-motions for summary judgment and have not
argued that a material issue of fact exists, “the Court shall deem the motions to be
the equivalent of a stipulation for decision on the merits based on the record
submitted with the motions.”23
III. ANALYSIS
In this action, Hyatt and Gore seek advancement of fees and expenses to
defend against the Counterclaims raised by Al Jazeera in the Underlying Action. As
the Plaintiffs point out, Al Jazeera agreed in the Merger Agreement to advance fees
and expenses to Current’s former officers and directors to the fullest extent provided
in the Operating Agreement. Because the Counterclaims require Hyatt and Gore to
defend actions taken while acting in their capacity as former officers and directors,
Plaintiffs argue that Al Jazeera is liable for the fees and expenses incurred thereby.
While Al Jazeera does not dispute that it agreed to advance fees and expenses to
Current’s former officers and directors, it argues that its Counterclaims are alleged
against Hyatt in his capacity as Members’ Representative only, and that, in such
capacity, Hyatt is not entitled to advancement in accordance with the Merger
Agreement. Furthermore, Al Jazeera describes Gore’s role in the Underlying Action
instruments setting forth the purported right to advancement and the pleadings in the proceedings for which advancement is sought.’”) (quoting Weinstock v. Lazard Debt Recovery GP, LLC, 2003 WL 21843254, at *2 (Del. Ch. Aug. 1, 2003)). 23 Ct. Ch. R. 56(h).
9 as a mere fortuity, arguing that Gore is a party to the action solely in his capacity as
a former member of Current, in which capacity he is not entitled to advancement.
While the issue of advancement implicates important policy concerns of the
ability of Delaware corporations to attract and retain talented officers and directors,24
the questions raised in this case largely turn on the interpretation of the Merger
Agreement. Accordingly, I begin my analysis by reviewing the relevant provisions
of the Merger Agreement. In light of the parties’ intentions, as reflected therein, the
second part of my analysis will examine the pleadings in the Underlying Action to
determine whether the costs of defending the Counterclaims are advanceable.
A. The Merger Agreement
The Merger Agreement, according to its terms, displaces all prior agreements
between the parties and is therefore the chief expression of their intent.25 Section 8
of the Merger Agreement governs the use of the Escrow Fund for indemnification.
Pursuant to Section 8.9 of the Merger Agreement, upon submission of a claim
24 See generally, Marino v. Patriot Rail Co. LLC, — A.3d —, 2016 WL 885576, at *13 (Del. Ch. Feb. 29, 2016) (stating that the public policy foundation for advancement and indemnification rights “is to ‘encourage capable men [and women] to serve as corporate directors, secure in the knowledge that expenses incurred by them in upholding their honesty and integrity as directors will be borne by the corporation they serve’”) (quoting Stifel Fin. Corp. v. Cochran, 809 A.2d 555, 561 (Del. 2002)). 25 Merger Agreement § 11.5 (“This Agreement, the Company Disclosure Letter and the exhibits and other documents referred to herein contain the entire agreement among the parties hereto with respect to the Merger and the other transactions contemplated hereby and supersede all prior agreements with respect thereto, whether written or oral, except to the extent specifically set forth herein or therein.”).
10 certificate by Al Jazeera, the Members’ Representative may challenge the claim
within twenty business days.26 If the parties do not resolve the claim within thirty
days of the Members’ Representative’s objection, either Al Jazeera or the Members’
Representative may bring suit in the state or federal courts in Delaware.27 Section
8.9(d) specifically provides for shifting of fees and expenses upon any judgment of
the court. That section states, in part, that “[t]he non-prevailing party to a suit shall
pay its own fees and expenses and the fees and expenses of the prevailing party,
including attorneys’ fees and costs reasonably incurred in connection with such
suit.”28
Al Jazeera argues that the fee-shifting provision in Section 8.9(d) reflects the
parties’ intention to solely provide indemnification—and therefore not
advancement—for all actions brought against the Members’ Representative to
resolve disputes regarding the Escrow Fund. It is Al Jazeera’s position, therefore,
that the terms of the Merger Agreement preclude advancement of fees for claims
brought against Hyatt in his capacity as Members’ Representative. Conversely, the
Plaintiffs argue that Section 8.9(d) addresses only the shifting of fees following the
final resolution of a dispute concerning the Escrow Fund and is otherwise silent as
to advancement. Furthermore, the Plaintiffs argue that advancement is specifically
26 Id. at § 8.9(a). 27 Id. at § 8.9(b)–(c). 28 Id. at § 8.9(d).
11 provided in Section 6.9(a) of the Merger Agreement, which provides that Al Jazeera
will indemnify and advance expenses to Current’s former officers and directors to
the extent provided in the Operating Agreement. Section 6.9(a) states, in part, the
following:
(a) For a period of six (6) years from and after the Closing Date, [Al Jazeera] agrees to indemnify (including advancement of expenses) and hold harmless all past and present officers and directors of [Current] or any of its Subsidiaries to the same extent such persons are indemnified by [Current] or such Subsidiary as of the date hereof pursuant to (i) [Current’s] Organizational Documents or such Subsidiary’s Organizational Documents . . . .29
Accordingly, the Plaintiffs contend that Current’s Operating Agreement controls the
determination of whether Hyatt and Gore are entitled to advancement.
At the heart of the contractual dispute here is whether, and in what
circumstances, the parties intended Section 8.9(d) or Section 6.9(a) of the Merger
Agreement to control the reimbursement of fees and expenses incurred to defend the
Counterclaims alleged in the Underlying Action. In order to determine the intent of
the parties, this Court “reads an agreement as a whole to give effect to each term and
to harmonize seemingly conflicting terms.”30
29 Id. at § 6.9 (emphasis added). 30 Stockman v. Heartland Indus. Partners, L.P., 2009 WL 2096213, at *6 (Del. Ch. July 14, 2009) (citing Council of the Dorset Condo. Apartments v. Gordon, 801 A.2d 1, 7 (Del. 2002)); see also Julian v. E. States Constr. Serv., 2008 WL 2673300, at *7 (Del. Ch. July 8, 2008) (“[W]hen interpreting a contractual provision, a court attempts to reconcile all of the agreement's provisions when read as a whole, giving effect to each and every term.”); Delta & Pine Land Co. v. Monsanto Co., 2006 WL 1510417, at *4 (Del. Ch. May 24, 2006) (“[C]ontracts must be interpreted in a manner that does not render any provision illusory or meaningless.”) (quotations omitted); In re
12 Al Jazeera argues that Section 8.9(d) displaces Hyatt’s advancement rights in
Section 6.9(a) because Hyatt is sued in the Underlying Action in his capacity as
Members’ Representative. I disagree with Al Jazeera’s interpretation of the Merger
Agreement, however. The first issue is whether the fee-shifting provision in Section
8.9(d), by itself, supplants the provision for advancement in Section 6.9(a). The
“fee-shifting”—or indemnification—provision in Section 8.9(d), as I read it, is
distinct from the right to advancement provided in Section 6.9(a). Although
indemnification and advancement rights are closely related, each are “distinct types
of legal rights,”31 and the “right to advancement is not ordinarily dependent upon a
determination that the party in question will ultimately be entitled to be
indemnified.”32 Therefore, the language in Section 8.9(d) does not displace the right
to advancement in Section 6.9(a). A contrary finding would eviscerate the covenant
in Section 6.9(a) to provide advancement to the “same extent” as provided in the
Operating Agreement,33 assuming advancement rights in the latter are triggered here.
Cencom Cable Income Partners, L.P. Litig., 2000 WL 640676, at *5 (Del. Ch. May 5, 2000) (“In order to discern the intent of the parties, the contract should be read in its entirety and interpreted to reconcile all of the provisions of the agreement.”). 31 Senior Tour Players 207 Mgmt Co. LLC, 853 A.2d at 128 (citing Nakahara v. NS 1991 Am. Trust, 739 A.2d 770, 779 (Del. Ch. 1998)). 32 Id. (citing Reddy v. Elec. Data Sys. Corp., 2002 WL 1358761, at *9 (Del. Ch. June 18, 2002) (noting that “the clear authorization of advancement rights presupposes that the corporation will front the expenses before any determination is made of the corporate official's ultimate right to indemnification”). 33 The right to advancement, I note, is extended only for a period of six years from the closing of the Merger.
13 The second aspect of Al Jazeera’s argument is that Hyatt is sued in his
capacity as Members’ Representative and not as a former officer and director, thus
precluding application of Section 6.9(a). Hyatt’s role as Members’ Representative
is separate from his former role as officer and director, however—the latter does not
eliminate the former, and his rights in each role are preserved in accordance with the
Merger Agreement.34 As I have already stated, the fee-shifting provision in Section
8.9(d) is distinct from, and does not conflict with, the right to advancement for
officers and directors in Section 6.9(a). What’s more, Al Jazeera agreed to select
Hyatt, a former officer and director of Current, as Members’ Representative in the
Merger Agreement.35 The parties could have, but chose not to, exempt Hyatt from
the right to advancement in his capacity as former officer and director as provided
in Section 6.9(a) of the same agreement. The fact that Hyatt is sued in his capacity
as Members’ Representative, therefore, does not displace his rights as a former
officer and director as otherwise provided in the Merger Agreement. Accordingly,
Hyatt (as well as Gore) is entitled to advancement as a former officer and director to
the extent provided in Section 6.9(a).
34 The same reasoning applies to Section 9.5 of the Merger Agreement. Section 9.5 provides that Current’s former members agree to “indemnify, defend and hold harmless” the Members’ Representative against certain damages, including “legal costs and expenses of defending the Members’ Representative against any claim . . . in connection with the performance of the Members’ Representative’s duties under [the Merger Agreement].” Merger Agreement § 9.5. Like Section 8.9(d), the rights and obligations in Section 9.5 are distinct from the right to advancement provided to former officers and directors by Section 6.9(a). 35 Id. at § 9.1.
14 B. Advancement
In accordance with Section 6.9(a) of the Merger Agreement, Hyatt and Gore
are entitled to advancement to the extent they would have been so entitled under
Current’s Operating Agreement. Section 11.2 of the Operating Agreement, which
confers the right to indemnification, states, in part, the following:
[E]ach person who was or is made a party or is threatened to be made a party to or is involved in any threatened, pending or completed action, suit or proceeding . . . by reason of the fact that he, or a Person of who he is the legal representative is or was a member of the Board of Directors or officer of [Current] . . . shall be indemnified by [Current] to the fullest extent permitted by the [Delaware Limited Liability Act] . . . against . . . costs, damages, and reasonable expenses (including, without limitation, attorneys’ fees) incurred by such Person in connection with having served in such capacity, and indemnification under this Section 11.2 shall continue as to a Person who has ceased to serve in the capacity that initially entitled such Person to indemnify hereunder.36
The next section confers the right to advancement. Section 11.3 states, in part, the
The right to indemnification conferred in this Article 11 shall include the right to be paid or reimbursed by [Current] the reasonable expenses incurred by a Person of the type entitled to be indemnified under this Article 11 who was, is or is threatened to be made a named defendant or respondent in a Proceeding in advance of the final disposition of the Proceeding and without any determination as to the Person’s ultimate entitlement to indemnification.37
When read together, Sections 11.2 and 11.3 provide a former officer or
36 Operating Agreement § 11.2 (emphasis added). 37 Id. at § 11.3 (emphasis added).
15 director who was, is, or is threatened to be made a named defendant in a proceeding
a right to reimbursement of reasonable expenses incurred “by reason of the fact” that
he is or was a member of the Board of Directors or officer of Current. As a threshold
matter, the parties agree that Hyatt and Gore would not be entitled to advancement
had they not been named as counterclaim-defendants in the Underlying Action. The
parties also agree that, while Current was a limited liability company not subject to
the Delaware General Corporate Law (“DGCL”),38 the Operating Agreement
confers advancement to former officers and directors that incur expense “by reason
of the fact” that he was a former officer and director—a standard that tracks the
language of Section 145 of the DGCL that grants a corporation the authority to
provide indemnification.39 Based on the clear language in those sections of the
Operating Agreement, and bolstered by the fact that both parties utilized this Court’s
discussions of Section 145 in their briefing, I conclude that the parties intended to
import the strictures of Section 145. Accordingly, my determination of the
38 While Current is not subject to the DGCL, it is subject to the Delaware Limited Liability Company Act (the “LLC Act”). Section 18–108 of the LLC Act “grants LLCs broad authority to provide for indemnification by contract in their agreements.” Senior Tour Players 207 Mgmt Co. LLC, 853 A.2d at 127 (referring to 6 Del. C. § 18–108). Furthermore, “it is ‘the policy of the [LLC Act] to give maximum effect to the principle of freedom of contract and to the enforceability of limited liability company agreements.’” Id. (quoting 6 Del. C. § 18–1101(b)). 39 See 8 Del. C. § 145(a) (“A corporation shall have power to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation) by reason of the fact that the person is or was a director, officer, employee or agent of the corporation, . . .”) (emphasis added).
16 Plaintiffs’ right to advancement is informed by the case law interpreting that
section.40
This Court has held that an action is brought “by reason of the fact” of a
defendant’s position as an officer or director if a “nexus or causal connection” exists
between the underlying proceedings and the defendant’s “official corporate
capacity.”41 The requisite “nexus or causal connection” exists if “corporate powers
were used or necessary for the commission of the alleged misconduct,”42 and may
be established “even if the cause of action does not specify a claim of breach of
fiduciary duty owed to the corporation.”43 Although the Court has found that the
“by reason of the fact” standard is generally interpreted broadly in favor of
advancement,44 the standard should not be construed to implicate every claim
40 See Costantini v. Swiss Farm Stores Acquisition LLC, 2013 WL 6327510, at *4 (Del. Ch. Dec. 5, 2013) (“As the parties chose to import language into the Operating Agreement—‘by reason of the fact’—from 8 Del C. § 145(a)-(b), case law interpreting that statutory provision bears on my understanding of the Operating Agreement's language.”). 41 Homestore, Inc. v. Tafeen, 888 A.2d 204, 214 (Del. 2005) (“[W]e hold that if there is a nexus or causal connection between any of the underlying proceedings contemplated by section 145(e) 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.”) (citations omitted). 42 Bernstein v. TractManager, Inc., 953 A.2d 1003, 1011 (Del. Ch. 2007) (citations omitted). 43 Id. (citing Perconti v. Thornton Oil Corp., 2002 WL 982419, at *7 n.35 (Del. Ch. May 3, 2002)). 44 Pontone v. Milso Indus. Corp., 100 A.3d 1023, 1050 (Del. 2014) (“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.’”) (quoting Underbrink v. Warrior Energy Servs. Corp., 2008 WL 2262316, at *7 (Del. Ch. May 30, 2008)).
17 brought against a current or former officer or director.45 For example, advancement
rights do not attach “when the parties are litigating a specific and personal
contractual obligation that does not involve the exercise of judgment, discretion, or
decision-making authority on behalf of the corporation.”46
In the Underlying Action, Al Jazeera’s Counterclaims allege seven counts
against Gore and Hyatt, most of which fundamentally relate to the argument that
Current breached representations and warranties at the time of the Merger. These
allegations form the bulk of Al Jazeera’s Claim Certificates seeking indemnification
from the disputed Escrow Fund. Six of the counts in the Counterclaims assert that
the former members of Current breached the Merger Agreement by failing to
indemnify Al Jazeera consistent with its Claim Certificates, and one count seeks a
declaratory judgment that Current’s former members must indemnify Al Jazeera for
those claims identified in the disputed Claim Certificates. In relief, Al Jazeera seeks,
among other things, an order compelling the “Counterclaim-Defendants”—that is,
Hyatt and Gore—“to indemnify Al Jazeera for the Damages claimed pursuant to the
Claim Certificates delivered to Hyatt as Members’ Representative.”47 In addition,
Al Jazeera seeks “compensatory damages in an amount to be determined at trial for
45 Weaver v. ZeniMax Media, Inc., 2004 WL 243163, at *3 (Del. Ch. Jan. 30, 2004) (noting that “‘by reason of the fact’ is not construed so broadly as to encompass every suit brought against an officer and director”). 46 Paolino v. Mace Sec. Intern., Inc., 985 A.2d 392, 403 (Del. Ch. 2009). 47 Counterclaims 234–35.
18 all injuries suffered as a result of the Counterclaim-Defendants’ breach of
contract.”48 Therefore, based on the relief originally sought in Al Jazeera’s
Counterclaims, Hyatt and Gore faced some quantum of individual liability.
However, at oral argument Al Jazeera clarified the relief it seeks, representing to the
Court that its Counterclaims are limited to the Escrow Fund.49 While I disagree that
its requested relief was so limited on the face of its original pleadings, I found that
Al Jazeera was estopped from seeking relief beyond the Escrow Fund based on that
representation.
Al Jazeera argues that the sole question before the Court with respect to the
Counterclaims is whether Hyatt, as Members’ Representative, properly rejected Al
Jazeera’s Claim Certificates. Therefore, according to Al Jazeera, the Counterclaims
question only Hyatt’s action in his role as Members’ Representative and do not reach
actions taken by Hyatt or Gore in their capacity as former officers and directors.
Hyatt and Gore, in response, argue that, while they do not face liability in their
capacity as officers and directors in the Underlying Action, the Counterclaims
nonetheless require them to defend their actions as former officers and directors.
The Plaintiffs argue that their position is supported by then-Master Legrow’s
48 Id. at 235 (emphasis added). 49 Oral Argument Tr. 6:12–20 (“THE COURT: Do the counterclaims in the underlying suit seek to recover beyond the escrow account? MR. REED: They do not. THE COURT: Just so we’re all clear, because I know there was some issue of it, I am planning to rely on that representation so judicial estoppel would arise. MR. REED: Absolutely.”).
19 final report in Rizk v. Tractmanager, Inc.50 In Rizk, following Arsenal Capital
Partners’ acquisition of Tractmanager, Inc. (“Tractmanager”), Rizk, Tractmanager’s
former CEO, and other former stockholders were sued in New York state court for
breach of contract stemming from alleged misrepresentations in the merger
agreement. In response, Rizk filed suit in this Court seeking advancement for fees
and expenses incurred in defense of the claims asserted in New York. Like Al
Jazeera here, the defendant argued that Rizk was not entitled to advancement in his
former capacity as officer and director because Rizk was sued for misrepresentations
made in his capacity as a seller.51 Master Legrow found that Rizk was entitled to
advancement, but noted that the case presented a “thorny issue that turns on the
particular facts of [the] case.” Ultimately, however, the Master determined that the
claim for breach of contract was “inextricably [] intertwined” with the action Rizk
took in his former capacity as CEO. Furthermore, the Master found that, in order to
prevail in the New York action, Rizk was necessarily required “to defend his actions
as CEO, and possibly disprove the allegations that he acted improperly in that
capacity.”52
50 Rizk v. Tractmanager, Inc., C.A. No. 9073-ML (Del. Ch. May 30, 2014) (MASTER’S FINAL REPORT). 51 Specifically, the defendant in Rizk argued that the sellers “made a series of representations and warranties in the Merger Agreement, placed money and equity in escrow to cover ‘potential indemnification liabilities’ associated with breaches of those representations and warranties, and that those escrowed funds are subject of the breach of contract claim.” Id. 52 Id.
20 I find Master Legrow’s reasoning persuasive to my analysis here. Although
the Counterclaims appear on their face to merely implicate Hyatt’s role as Members’
Representative, the resolution of the validity of the Claim Certificates in the
Underlying Action, in part, necessarily requires Hyatt and Gore to defend their
actions as former officers and directors, for which they are contractually entitled to
advancement. Without such a (successful) defense, the rights of Hyatt and Gore
(and the other former members of Current) in the Escrow Fund will be forfeit.
Accordingly, I will examine each count in the Counterclaims, and the issues raised
in the corresponding Claim Certificates, to determine whether the allegations
establish sufficient “nexus” to Hyatt’s and Gore’s “corporate powers” such that
advancement of fees and expenses is appropriate. 53
In Counts I, II, and III, Al Jazeera seeks validation of those Claim Certificates
that allege that Current breached the Merger Agreement by falsely representing that
Current was in compliance with its distributor agreements, including the MFN
provisions54 therein. Specifically, Al Jazeera points to three distributors—AT&T
Services, Inc. (“AT&T”), Dish Network, LLC (“DISH”), and DirecTV, LLC
(“DirecTV”)—that have initiated disputes with Al Jazeera alleging that Current was
53 I note that the following analysis does not describe each Count in its entirety, but instead highlights those allegations that are relevant to my determination of advancement. 54 Generally speaking, “MFN provisions” are undertakings that the contracting party will be treated at least as well as other distributors similarly situated.
21 in violation of its MFN provision at the time of the Merger. For example, Al Jazeera
asserts that Hyatt and Gore, in a rush to close the deal, agreed to pay DirecTV $10
million to obtain its consent to the change in ownership of Current.55 According to
Al Jazeera, DISH alleged that the payment to DirecTV violated the MFN provision
in its distribution agreement with Current and demanded a similar payment. In its
Claim Certificate, therefore, Al Jazeera requests indemnification for the additional
$10 million payments— and other payments—that Al Jazeera alleges it is and will
be required to make as the result of Current’s alleged breach of MFN provisions.
Hyatt, as Members’ Representative, rejected the Claim Certificate, prompting Al
Jazeera to file its Counterclaims for breach of contract.
In order to defend Hyatt’s rejection of the Claim Certificates, Hyatt and Gore,
like the plaintiff in Rizk, will be required to defend their actions as officers and
directors. The underlying pleadings are telling. According to Al Jazeera’s
Counterclaims, Current’s distribution contracts were “the most critical part of the
Merger Agreement.”56 As a result, Al Jazeera specifically negotiated the inclusion
of representations and warranties in the Merger Agreement that would remain in
effect after the Merger to avoid responsibilities for “liabilities incurred by [Current]
while [it] was being run by Gore and Hyatt.”57 Al Jazeera explains in its
55 Counterclaims ¶¶ 55–56. 56 Id. at ¶ 49. 57 Id. at ¶ 10.
22 Counterclaims that the protections in the Merger Agreement were important because
“the distributors’ relationships with Hyatt had deteriorated over time.” 58
Specifically, Al Jazeera notes that, pursuant to the Merger, “Hyatt assumed
responsibility for obtaining the consent agreements,”59 and that, ultimately, the
“process proved very difficult for Hyatt as distributors had developed a dislike for
Hyatt as a result of his mismanagement of Current.”60 Therefore, the underlying
basis of the Claim Certificates create a significant likelihood that Hyatt and Gore
will be forced to defend actions that they took as officers and directors in order to
successfully defend the Counterclaims and vindicate their rights to the funds in
escrow. Accordingly, Hyatt and Gore are entitled to advancement for Counts I, II,
and III.
In Count IV, Al Jazeera seeks validation of a Claim Certificate that alleges
that Current’s former members agreed in the Merger Agreement to indemnify Al
Jazeera for fifty percent of the expenses it incurred to perfect the “termination,
cancelation, discontinuance or nonperformance” of a pre-existing distribution
agreement between Al Jazeera—not Current—and Time Warner Cable, Inc.
(“TWC”). Prior to the Merger, Al Jazeera and TWC entered into a distribution
58 Id. at ¶ 81. 59 Id. at ¶ 51. 60 Id. at ¶ 52.
23 agreement relating to the distribution of the Al Jazeera English (“AJE”) service.61
According to the Counterclaims, before closing the Merger, the parties agreed that
the AJE distribution agreement with TWC needed to be terminated. The parties,
therefore, amended the Merger Agreement to require Current’s former members to
indemnify Al Jazeera for fifty percent of the expenses that Al Jazeera incurred to
terminate its distribution agreement with TWC.62 Al Jazeera asserts that Hyatt, as
Members’ Representative, rejected its Claim Certificate requesting indemnification
of half of those expenses, which, according to Al Jazeera, Hyatt is required
contractually to reimburse in accordance with the Merger Agreement, as amended.
Unlike Counts I, II, and III, this Count focuses solely on the terms of the Merger
Agreement and does not require Hyatt and Gore to defend actions taken in their
official capacity. Accordingly, Hyatt and Gore are not entitled to advancement for
Count IV.
In Count V, Al Jazeera seeks validation of a Claim Certificate that asserts that
Al Jazeera was forced to make a settlement payment to CBS Broadcasting, Inc.
(“CBS”) to settle a dispute between Current and CBS that existed at the time of the
Merger. Current disclosed the dispute with CBS in the Merger Agreement.
According to Al Jazeera, however, Current had represented that the resolution of the
61 Id. at ¶ 120. 62 Id. at ¶ 121.
24 claim would not result in a substantial payment to CBS.63 Like Counts I, II, and III,
this claim implicates Hyatt’s and Gore’s official capacities as they will be forced to
defend their negotiations with CBS as well as the characterization in the Merger
Agreement of the resolution of those negotiations. Therefore, Count V is an
advanceable claim.
In Count VI, Al Jazeera seeks validation of a Claim Certificate that requests
reimbursement of defense costs that Al Jazeera allegedly paid on behalf of Hyatt as
Members’ Representative. Hyatt, in his capacity as Members’ Representative,
controlled the defense of a third party claim—referred to by the parties as the
“Terenzio Claim”—raised against Current after the Merger.64 According to Al
Jazeera, the Merger Agreement provides that the Members’ Representative is
responsible for all costs associated with defending third party claims. 65 However,
without waiving its contention that the Members’ Representative is responsible for
those costs, Al Jazeera agreed to pay Hyatt’s fees and expenses associated with
defending the Terenzio Claim with an understanding that, in the event that the
balance of the Escrow Fund was insufficient to indemnify Al Jazeera for those costs,
it could recover the costs directly from the Members’ Representative.66 According
63 Id. at ¶ 123. 64 Id. at ¶ 127. 65 Id. 66 Id.
25 to Al Jazeera, Hyatt has denied any such responsibility and has objected to its claim
for reimbursement in breach of the Merger Agreement.67
The crux of the dispute in Count VI is whether Al Jazeera may seek
reimbursement from Hyatt for fees and expenses beyond the balance of the Escrow
Fund. This dispute, therefore, will turn on the arrangement between Al Jazeera and
Hyatt, as Members’ Representative, as well as the interpretation of the Merger
Agreement, and not Hyatt’s and Gore’s actions as directors and officer.
Accordingly, Count VI does not create the requisite “nexus” to Hyatt and Gore in
their former capacity and is a non-advanceable claim.68
Finally, Count VII seeks numerous declarations that the former members of
Current must indemnify Al Jazeera for the Claim Certificates at issue in Counts I
through VI. Therefore, Count VII is advanceable to the extent it seeks declarations
related to those counts that are advanceable—namely, Counts I, II, III, and V.
C. Fees on Fees and Interest
Hyatt and Gore argue that they are entitled to their legal fees and expenses
incurred in this action. This Court has found that “plaintiffs who succeed in
67 Id. at ¶ 176. 68 Hyatt and Gore argue that Al Jazeera previously acknowledged that the Terenzio Claim encompasses the requisite nexus to the Plaintiffs’ capacities as directors and officer, and that Al Jazeera has thus “conceded” that Counterclaim Count VI is advanceable. The Plaintiffs’ argument, however, misconstrues Al Jazeera’s Counterclaims. The underlying Terenzio Claim involves, in part, whether Hyatt and Gore are liable to the plaintiff there for a “finder’s fee” in relation with the sale of Current to Al Jazeera; defenses costs of that claim are advanceable. The Counterclaim, however, does not implicate Hyatt’s and Gore’s underlying liability.
26 prosecuting a request for advancement or indemnification are entitled to receive fees
on fees.”69 Accordingly, Hyatt and Gore are entitled to reimbursement of their legal
fees and expenses incurred to litigate this action to the extent they have been
successful in establishing a right to advancement.
The Plaintiffs also request an award of pre- and post-judgment interest. In
Delaware, “prejudgment interest is awarded as a matter of right.”70 Hyatt and Gore
are entitled, therefore, to pre-judgment interest from the date on which their demand
and undertakings were delivered to Al Jazeera.71 For those expenses incurred after
the demand and undertaking were delivered, Hyatt and Gore are entitled to pre-
judgment interest from the date those expenses were paid.72 Furthermore, “Delaware
courts routinely grant post-judgment interest in advancement cases.”73 Hyatt and
Gore are entitled to post-judgment interest accordingly.
IV. CONCLUSION
Based on the foregoing, Counts I, II, III, and V, and the related portions of
Count VII are advanceable. In addition, the Plaintiffs are entitled to fees on fees
69 Zaman v. Amedeo Holdings, Inc., 2008 WL 2168397, at * 39 (Del. Ch. May 23, 2008) (citing Stifel Fin. Corp., 809 A.2d at 561). 70 Citadel Holding Corp. v. Roven, 603 A.2d 818, 826 (Del. 1992) (citing Moskowitz v. Mayor & Council of Wilmington, 391 A.2d 209 (Del. 1978)). 71 Underbrink, 2008 WL 2262316, at *19 (“A party seeking advancement is entitled to interest from the date on which the party ‘specified the amount of reimbursement demanded and produced his written promise to pay.’”) (quoting Roven, 603 A.2d at 826 n.10). 72 Id. 73 Id. (citations omitted).
27 related to those advanceable claims, as well as pre- and post-judgment interest. The
parties should submit a form of order consistent with my decision.