Most merger agreements involving public company targets include a covenant from the buyer obligating it to cause the survivor to continue to indemnify & advance expenses to former officers & directors of the target who are sued by virtue of their former positions. That obligation can come back to bite a buyer if it wants to hold one of those parties liable for alleged pre-closing misconduct, because the buyer can find itself paying for the defense of its own claim. Of course, if you represent the seller, you’d view that as a feature, not a bug, of the contractual indemnity provisions that you negotiated.
Anyway, in Carr v. Global Payments, (Del. Ch.; 12/19), a buyer brought breach of fiduciary duty & contract claims against the former CEO of the target. These arose out of insider trading allegations made against him involving actions prior to the merger. Accordingly, he asserted a right to advancement of his litigation expenses, which the Chancery Court upheld.
But after amending its complaint to eliminate all claims relating to conduct allegedly occuring prior to the termination of his employment, the buyer argued that those advancement obligations no longer applied to the case. Vice Chancellor Glasscock agreed, but noted that courts will look closely at these amended pleadings in order to ensure they aren’t just an end run around advancement & indemnity obligations:
The principle underlying this line of cases is that amendment can eliminate advancement obligations, but only if the amendment and the amending party’s representations alter the claim in a manner that assures the Court the plaintiff will not face litigation that triggers advancement obligations. Having first found that a claim requires advancement, the Court must be vigilant in review for artful pleading, and ensure that cosmetic changes to pleadings do not defeat vested contract rights.
The Vice Chancellor went on to say that even looking at the amended complaint with a “jaundiced eye,” it effectively mooted the advancement claim because it eschewed relying on any pre-termination conduct as the basis for the buyer’s lawsuit.
– John Jenkins