Often times, a Delaware company will provide its directors and officers with advancement and indemnification to the fullest extent allowed under Delaware law, as a means to attract qualified individuals to run the company.  Under Delaware law, it is commonly held that a director or officer will be entitled to “fees on fees” for bringing a successful claim for advancement.  What if the company’s governing documents allow for “fees on fees” for any good faith claim brought for advancement, even if unsuccessful?

This precise issue was addressed in the very recent opinion of Lieberman v. Electrolytic Ozone, Inc., C.A. No. 10152-VCN (Del. Ch. Sept. 5, 2015).  There, the operative documents provided that the company’s directors and officers “shall be entitled to be paid all court costs and expenses, including reasonable attorney’s fees…” unless the Court determined that each of the assertions made by indemnitee were not made in good faith.  As such, the operative documents required that reasonable “fees on fees” be paid even if the advancement claim was not successful, so long as it was made in good faith.

The Court rejected indemnitee’s advancement claim (to be discussed in subsequent post), and further rejected indemnitee’s claim for reasonable attorneys’ fees in bringing the action.  As explained by the Court:

Unfortunately for Plaintiffs, Delaware corporations lack the contractual power to compensate a party for fees and expenses incurred while pursuing a failed underlying claim. Because that capacity is foreclosed by both statutory and common law, “[a] party must succeed (at least to some extent) on its underlying indemnification action to have a legally cognizable claim for monies expended in forcing its indemnitor to make it whole.” Because Plaintiffs are wholly unsuccessful on their request for advancement, they cannot recover the expenses they incurred in bringing this action.

(Lieberman, slip op. at 19, internal citations omitted).  Accordingly, this decision makes clear that the Court will not uphold an agreement allowing for a shifting of attorneys’ fees in favor of a director or officer for advancement or indemnification claims, when claimant enjoys no success on the underlying claim.

If you would like to speak to a litigator in Fox Rothschild’s Delaware office, please reach out to Sid Liebesman (302) 622-4237 or Seth Niederman (302) 622-4238.