May 12, 2017

Post-Closing Suits: Selling Stockholders Entitled to Advancement

This blog from Steve Quinlivan reviews the Delaware Chancery Court’s recent decision in Davis v. EMSI Holding – where the Court held that selling stockholders facing indemnity claims from the buyer were entitled to expense advancement as former D&Os of the target. As this excerpt notes, the Court reached that conclusion despite the existence of a broad release of claims by the selling stockholders in the stock purchase agreement:

The relevant provision of the stock purchase agreement included a broad release of the plaintiffs’ claims against the acquired entity. However, there was a carve out to the release which provided that the release did not apply to any right to indemnification the plaintiffs had as an officer or director under the relevant governing documents. The Court found the defendant’s argument that the carve out only applied to pre-existing third party claims and not to first party claims under the stock purchase agreement was illogical as the release applied to both first party and third party claims.

The Court also rejected claims that the stockholders weren’t sued in their capacity as officers.  While the claims may have been couched as breaches of reps & warranties, they were premised on alleged misuse of their positions as D&Os of the company to engage in a financial fraud.

John Jenkins