DealLawyers.com Blog

In November, John blogged about the Chancery Court’s recent decision in GB-SP Holdings LLC et al. v. Walker (Del. Ch.; 11/24). This Fried Frank M&A briefing on the case discusses the facts that caused Vice Chancellor Fioravanti to evaluate the adoption of the forbearance agreement under the entire fairness standard. He found that the directors were materially conflicted as a result of indemnification rights they secured for themselves — under unusual circumstances — in connection with approving a Foreclosure Agreement with the company’s creditor.

The scope of the indemnification rights in the Indemnity Agreement between Versa and the Company extended beyond claims arising out of the Foreclosure Agreement, to cover also any claims brought by the company’s controlling stockholder, GB-SP, Inc. (whether relating to the Foreclosure Agreement or not). When the directors sought the indemnification rights, they knew that they had breached GB-SP’s rights under a Shareholders Agreement, and knew that they could not obtain insurance that would cover liability for those breaches because the policy excluded claims from major shareholders.

The alert highlights this related key takeaway:

Under some circumstances, directors may be rendered self-interested when they secure indemnification rights in connection with approving a transaction. Normally, obtaining indemnification rights would not render directors self-interested—because indemnification is commonplace in corporate affairs and does not increase a director’s wealth. In this case, however, the court stressed “the troubling circumstances surrounding the receipt of indemnification.”

– Meredith Ervine