After a Merger, Protecting Rights to Advancement and Indemnification

For both companies and individual officers and directors, it’s critically important to know the protections that are available to corporate leadership before a company runs into trouble.

The Delaware Chancery Court’s recent decision in Hyatt v. Al Jazeera America Holdings II, LLC, presents an unusual twist on the typical advancement litigation. It highlights how proper planning can ensure the intended protections are available when they are needed.

Typically, advancement cases follow a familiar pattern: a company promises officers and directors (and sometimes employees) that in the event of legal proceedings related to their duties at work, they will be protected by advancement of legal costs and indemnification.

Then, when the company sues the director, officer, or employee—or the person is alleged to have engaged in misconduct—the company attempts to withhold these benefits.

In the Hyatt case, by contrast, the persons seeking advancement were never employed by Al Jazeera. Rather, they were former officers and directors of Current Media LLC (“Current”), a company Al Jazeera had acquired.

Briefly, the facts that led to the court’s decision were as follows: When Al Jazeera bought Current, a portion of the merger proceeds were escrowed. Hyatt, a former director and officer of Current, was appointed to control the escrow account. If Al Jazeera believed it was subjected to liability because of Current’s pre-merger conduct, it could make a claim against the escrow and Hyatt would evaluate the claim. If Hyatt deemed the claim to be proper, he was empowered to pay it from the escrow. If the parties disagreed about whether a claim should be paid from the escrow account, either party had the right to seek judicial relief. At the conclusion of the escrow period, any remaining balance was to be distributed to the former members of Current, including Hyatt and former Vice President Al Gore.

Al Jazeera made several claims against the escrow, which Hyatt denied. At the conclusion of the escrow period, Hyatt and Gore instituted an action against Al Jazeera, seeking to invalidate Al Jazeera’s claims against the escrow account and to release the escrowed funds. Al Jazeera filed counterclaims against Hyatt and Gore for breach of the merger agreement based upon Hyatt’s denial of its escrow claims. Al Jazeera also alleged that the representations and warranties in the merger agreement had been breached and that it was entitled to the funds in the escrow.

Hyatt and Gore then sought advancement of their legal fees from Al Jazeera, as successor to Current. Although Al Jazeera had expressly assumed these advancement obligations as part of the merger transaction, it refused this demand. Hyatt and Gore then sued to enforce the obligations.

In the separate advancement case, Al Jazeera claimed that Hyatt engaged in the conduct at issue after the merger in his capacity as the representative of the former Current members, as opposed to in his role as a Current officer and director.

Because there was no agreement to indemnify members for post-merger conduct, Al Jazeera argued that advancement was unwarranted. Al Jazeera also claimed that the merger agreement only provided for indemnification of litigation expenses in the event the employees ultimately prevailed on the merits, and not the interim remedy of advancement.

The Delaware Court of Chancery closely reviewed the merger agreement, because it superseded all prior agreements among the parties. The court determined that Al Jazeera had assumed both the obligation of advancement and indemnification for the former officers and directors of Current. Therefore, the court concluded that if the claims asserted by Al Jazeera implicated a traditional right to advancement, Hyatt and Gore would be entitled to that benefit.

Next, the court considered each of the seven underlying claims to determine whether they were brought against the former employees “by reason of the fact” that they were officers or directors of Current.

Under Delaware law, this determination requires finding of a “nexus or causal connection” between the claim and the individual’s duties before the right to advancement is triggered. This nexus exists if “corporate powers were used or necessary in the commission of the alleged misconduct.”

For five of Al Jazeera’s seven counterclaims, the Chancery Court found in favor of Hyatt and Gore, ruling that they were entitled to advancement because resolving those claims necessarily required Hyatt and Gore to defend their conduct as former officers and directors of Current. The court also awarded Hyatt and Gore their “fees on fees”—in other words, the attorneys’ fees and expenses they had spent to enforce this advancement right.

However, as to two other counterclaims, the court found that Hyatt and Gore were not entitled to advancement. The court found that those claims did not implicate the plaintiffs’ conduct as Current officers and directors, because they turned only on the interpretation of the merger agreement and the post-merger dealings between the parties.

As the Hyatt decision shows, provisions in merger agreements that allow for advancement and indemnification to former officers and directors of an acquired company can be critical when those officers and directors become embroiled in litigation about the acquisition. In mergers, thanks to Hyatt and other decisions like it, buyers and sellers are likely to be more focused than ever on the scope of these important protections.

Information provided on InsightZS should not be considered legal advice and expressed views are those of the authors alone. Readers should seek specific legal guidance before acting in any particular circumstance.

As the regulatory and business environments in which our clients operate grow increasingly complex, we identify and offer perspectives on significant legal developments affecting businesses, organizations, and individuals. Each post aims to address timely issues and trends by evaluating impactful decisions, sharing observations of key enforcement changes, or distilling best practices drawn from experience. InsightZS also features personal interest pieces about the impact of our legal work in our communities and about associate life at Zuckerman Spaeder.

Information provided on InsightZS should not be considered legal advice and expressed views are those of the authors alone. Readers should seek specific legal guidance before acting in any particular circumstance.