Business Litigation
Delaware Supreme Court Declines to Enforce a “Conclusive and Binding” Charter Provision That Would Immunize Breaches of the Fiduciary Duty of Loyalty
By K. Tyler O'Connell of Morris James LLP
In CCSB Financial Corp. v. Totta, 2023 WL 4628822 (Del. Jul. 19, 2023), the Delaware Supreme Court affirmed the Court of Chancery’s post-trial decision that a so-called “Conclusive and Binding Provision” in a certificate of incorporation—providing that any “good faith” board decisions applying a stockholder voting limitation shall be “conclusive and binding upon the Corporation and its stockholders”—could not prevent judicial review for directors’ compliance with the fiduciary duty of loyalty. Having so found, the Court of Chancery ruled that the incumbent directors misapplied the voting limitation, and that they wrongfully refused to count votes that would have resulted in the election of insurgent directors.
In affirming the decision, the Supreme Court explained: “[w]hen the Court of Chancery reviews a claim in this context, the court, as it did here, performs a two-step review – first, it tests the legality of the board’s action under the charter, and second, it applies enhanced judicial review under established standards. CCSB argues in essence that the Conclusive and Binding Provision eliminates the first step, and requires business judgment review for the second step.” Such a provision was inconsistent with Section 102(b)(7) of the Delaware General Corporation Law (DGCL), which the Court reasoned “specifically prohibits a charter provision that directly or indirectly limits director liability for breaches of the duty of loyalty.” The Supreme Court reasoned that such a provision could be included in a Delaware limited liability company agreement or a Delaware limited partnership agreement, but it could not be included in a Delaware certificate of incorporation. Thus, the incumbent directors’ attempt to use it “to exculpate themselves from a breach of the duty of loyalty” was “prohibited by Delaware statute and public policy.” The Supreme Court accordingly affirmed the Court of Chancery’s decision that the insurgent slate prevailed in the election. It also affirmed that the insurgents’ efforts in obtaining a judicial construction of the provision comprised a corporate benefit entitling them to reimbursement of their attorneys’ fees and expenses.
Delaware Court of Chancery Holds Company in Contempt for Failure to Pay Advancement
By K. Tyler O’Connell of Morris James LLP
Directors, officers, and other members of management often have the right under a company’s organizational documents to have defense costs advanced during the pendency of a covered case, investigation, or other proceeding. If the company does not comply, the person with advancement rights can initiate a summary advancement proceeding in the Delaware Court of Chancery to obtain a dourt order requiring payment by a date certain. In Gandhi-Kapoor v. Hone Capital LLC, 2023 WL 4628782 (Del. Ch. Jun. 19, 2023), the Court of Chancery held that a failure to pay as required is punishable as contempt.
Here, the advancement petitioner was the former chief financial officer and a partner of a venture capital fund. Her employment was terminated for disputed reasons, and the fund sued her. Although the Court of Chancery ordered mandatory advancement, the company did not pay, forcing her to bring a motion for contempt. The Court reasoned that, although money judgments generally are not enforceable by contempt, advancement orders are different. They are interim fee awards intended to be paid on an ongoing basis during the life of the advancement proceeding. Moreover, the Court of Chancery has broad equitable discretion to shape relief when there otherwise was an inadequate remedy at law. A company’s failure to provide mandatory advancement may threaten irreparable harm—potential prejudice in the underlying proceeding that cannot readily be undone. In granting sanctions, the Court exercised its discretion and imposed the least possible sanction that it believed may ensure compliance. The Court denied the petitioner’s request for a limited purpose receiver, reasoning that, while that relief could be available, it was not appropriate in the presently known circumstances. The Court imposed a $1,000 per day fine, an amount that the Court held appropriately exceeded the returns per day the venture capital firm might expect to realize on the withheld amounts. The Court reasoned that additional contempt sanctions may be imposed in the future if necessary to enforce compliance.