June 25, 2019

Indemnification: A Win’s a Win

Section 145(c) of the DGCL provides a broad right to mandatory indemnification for a corporate director or officer who has been “successful on the merits or otherwise” in defending against an action brought against that person in their capacity as a director or officer. The Chancery Court’s recent decision in Brown v. Rite-Aid Corporation (Del. Ch.; 5/19) says that this highlighted language means exactly what it says – even if the individual was previously held criminally liable for the conduct at issue & managed to dodge liability in the case for which indemnity was sought on a procedural technicality.

Here’s an excerpt from Francis Pileggi’s recent blog on the case addressing the reasoning underlying Vice Chancellor Zurn’s decision:

The court recited the public policy rationale behind mandatory indemnification as including the need to encourage capable individuals to serve as corporate directors, which is viewed less as an individual benefit and more as a desirable mechanism in return for greater corporate benefits.

A key point and an essential aspect of the court’s reasoning is its reliance on an abundance of case law that interprets the “success” requirement in Section 145(c) very broadly. That is, in order to satisfy the requirement of success “on the merits or otherwise” under Section 145(c), one must merely obtain any result in a lawsuit “other than conviction,” which does not equate with moral exoneration, but rather can be satisfied merely from: “escape from an adverse judgment or other detriment, for whatever reason . . .

Moreover, if such a broad definition of success is achieved, it is not relevant, and the court will not inquire into, whether all arguments were won, or if preliminary motions or other efforts in the underlying litigation failed before the final successful result was reached.

John Jenkins