The Delaware Supreme Court recently affirmed a Court of Chancery decision that enjoined an energy company from adopting a shareholder rights plan, or “poison pill.”  

This coverage dispute concerned the obligation to pay defense costs and a settlement arising out of an underlying stockholder claim against a company’s directors and officers for breach of fiduciary duty. 

In the underlying stockholder action, the individual insureds were sued in their capacities as both officers and directors of the company, as well as controlling stockholders. The individual insureds sought coverage under the company’s directors and officers liability (“D&O”) insurance policy, arguing that because the action was brought against them in their roles as both stockholders and covered directors, the D&O insurer was responsible for the entire settlement as the claims against them could not be separated.

The court disagreed, finding the D&O policy only provided coverage for those claims brought against the individual insureds involving their acts as directors of the company. By trying to find coverage for the claims brought against the directors in their capacities as controlling stockholders, the court noted the company sought “to expand the scope of coverage” provided by the policy.

In so finding, the court looked to the relevant language of the D&O policy, which stated, in part, that coverage was provided for insured persons for a “Company Loss … resulting from a Claim … for a Wrongful Act.” The policy defined “Wrongful Act” as a “breach of duty by an Insured Person while acting in his or her capacity as an Insured Person,” which was further defined as directors and officers, but not stockholders, of the company. Accordingly, the court found that coverage for the individual insureds was limited under the relative exposure rule to amounts allocated to settlement and defense based on the individuals’ actions as directors of the company, but not as controlling stockholders.

In the underlying action, a management consulting company filed litigation against its former CEO alleging he breached his duty of loyalty by engaging in self-interested transactions, authorizing improper expenditures, and failing to maintain proper documentation. 

At trial, the Delaware Chancery Court found that the former CEO breached his fiduciary duties and awarded damages on one count in the complaint, but ruled in favor of the former CEO on all the other counts. The former CEO previously sought indemnification and advancement of costs from the company but such demand was refused.

Following the conclusion of the fiduciary duty litigation, the former CEO filed suit seeking indemnification under Delaware General Corporate Law for fees and expenses in the fiduciary duty litigation and “fees on fees” for the current indemnification action. The suit alleged that since the former CEO was “vindicated on all of the claims brought against him, except one,” he was entitled to indemnification under Delaware’s mandatory indemnification provisions. Further, the former CEO argued that since the damages awarded against him were only 1.2% of the damages sought, “he should be deemed indemnified for 98.8% of his defense costs,” including that same percentage for costs incurred defending the breach of duty of loyalty claim.

The court disagreed and found the former CEO’s argument for proportional indemnification to be “unprecedented” and unsupported by Delaware law. Further, the court held that “to define a party’s success for indemnification purposes based on the proportion of damages recovered on a single claim would be unworkable.” Instead of basing proportional indemnification on a percentage of damages awarded, Delaware Courts will continue to determine whether a person was successful, or vindicated, on a “claim by claim basis.” In the subject case, the court held that the former CEO was not entitled to indemnification for a portion of the expenses incurred in defending the breach of duty of loyalty claim given he did not prevail on that claim.