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ABA FLASH REPORT-Delaware Supreme Court Emphasizes Public Policy Behind Support of Advancement

Posted on December 8, 2016 in

The following is a reposting of the Delaware Supreme Court Emphasizes Public Policy Behind Support of Advancement, written by Brett M. Amron, Development Chair of the D&O Liability Committee for the Business Law section of the ABA.

The Delaware Supreme Court recently held that an LLC cannot use a summary proceeding to avoid paying a former executive’s advancement by claiming that the underlying employment agreement was fraudulently induced or invalid for some reason unrelated to that provision. Trascent Mgmt. Consulting, LLC v. Bouri, No. 126, 2016, WL 6947014 (Del. Nov. 28, 2016).

Trascent hired a top executive, George Bouri, to serve as a part owner, Managing Principal, and member of its Board of Managers. Sixteen months later, Trascent terminated Bouri, and sued him for allegedly violating his employment agreement by making false statements about the company and the reasons for his departure. Bouri sought advancement to defend himself in the lawsuit pursuant to the plain language of his employment agreement, as well as Trascent’s operating agreement. In response, Trascent argued that Bouri was not entitled to advancement because the employment agreement, on which many of its claims against Bouri were based, was induced by fraud; thus, the agreement was invalid.

In affirming the Court of Chancery’s earlier finding, the Supreme Court concluded that such a defense by Trascent was a plenary claim, and that allowing such a claim would permit Trascent to escape its clear promise to make advancement until a court found indemnification inappropriate. The Supreme Court went on to explain that authorizing that defense would undermine the General Assembly’s purpose in making advancement proceedings summary in nature by enabling an employer to engage a key executive on a promise of advancement, and then introduce into summary proceedings for the enforcement of that right, a complicated plenary claim, the basis for which will frequently, as it did in this case, overlap with the merits of the very claims triggering the manager’s advancement rights.

Although the principles in this case are not new, the opinion is noteworthy in that it sets forth the public policy reasons in support of advancement for corporate officials and executives, including the need for expedited resolution of such claims in the Chancery Court. The opinion is also important as a foreseeable rejection of fraud as a defense to payment of advancement fees.