In a prior post, we discussed the “by reason of the fact” requirement in Delaware advancement proceedings.  In that post, we addressed the decision of Lieberman v. Electrolytic Ozone, Inc., C.A. No. 10152-VCN (Del. Ch. Sept. 5, 2015) which qualified as a relatively uncommon finding that the claims for which advancement was sought did not qualify under the statutory “by reason of the fact” standard.

A recent Court of Chancery decision, Hyatt v. Al Jazeera America Holdings II, LLC, C.A. No. 11465-VCG (Del. Ch. Mar. 31, 2016) shed more light on this standard.  Vice Chancellor Glasscock found that the former directors seeking advancement were sued “by reason of the fact” that they were directors in connection with a lawsuit over a merger agreement escrow account.

The court held that advancement would be required when the acts alleged involved acts the former directors took in their capacity as directors, even if the underlying suit was against them as former owner representatives.  The Court focused on the acts that lead to potential liability that count, not the capacity in which defendant is being sued.

Citing various sources, Vice Chancellor Glasscock shed light on the “by reason of the fact” standard, stating that:

This Court has held that an action is brought “by reason of the fact” of a defendant’s position as an officer or director if a “nexus or causal connection” exists between the underlying proceedings and the defendant’s “official corporate capacity.”  The requisite “nexus or causal connection” exists if “corporate powers were used or necessary for the commission of the alleged misconduct,” and may be established “even if the cause of action does not specify a claim of breach of fiduciary duty owed to the corporation.”

Moreover, the court referred to Section 18-108 of the Delaware LLC Act as giving broad authority to LLCs to provide indemnification by contract. Specifically, the court in this case found that the parties “intended to import the strictures of Section 145” by using the same language in their agreement.

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.