February 6, 2007

Proxy Contests for Minority Board Seats: Director Indemnification While Seeking Office

Travis Laster reports: Here is a case is one that may slip under the radar but which has implications for proxy contests for minority board seats. In FGC Holdings Ltd. v. Teltronics, C.A. No. 883 (Del. Ch. Jan. 22, 2007), Vice Chancellor Parsons held that a director was NOT entitled to indemnification for fees and expenses incurred enforcing his entitlement to be seated as a director. Vice Chancellor Parsons held that for purposes of Section 145(a) and (b) of the General Corporation Law, the plaintiff could not meet the “is or was a director” requirement because he was not yet a director at the time he incurred the fees and expenses.

Vice Chancellor Parsons also denied the request for mandatory indemnification under Section 145(c) for a proceeding in which the director had been “successful on the merits or otherwise” because mandatory indemnification also requires that the individual meet the covered capacity requirements of Section 145(a) and (b).

FGC Holdings was issued in connection with an attempt to enforce the right of a preferred stockholder to seat a director to which they were entitled under a certificate of designations. The same analysis, however, should apply to seated directors’ efforts to obtain indemnification for expenses incurred in successful proxy contests for minority board seats. It will not affect successful proxy contests for board majorities, who can simply vote to reimburse themselves their expenses.