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Bylaws May Contain Conditions to Grant of Advancments Rights that Supplement Advancement Rights in Charter

By Francis G.X. Pileggi

Xu Hong Bin v. Heckmann Corp., No. 4802-CC (Del. Ch., January 8, 2010), read letter decision here. The Delaware Court of Chancery previously granted partial summary judgment in favor of Xu on one of the counterclaims by Heckmann. Read summary of that prior decision in this case here. This ten-page letter decision from the Delaware Court of Chancery contains important analysis and recitation of Delaware law on both advancement and indemnification.

Key Issue

One of the key issues addressed by the Court was whether the provisions in the bylaws that allow the board to impose reasonable conditions prior to advancing legal fees were consistent with or contrary to the right to advancement contained in the Certificate of Incorporation.

Legal Analysis

The Court determined that there was no violation of Delaware General Corporation Law Section 109(b) in connection with the provisions in the bylaws that allowed the board to impose reasonable conditions on advancement, for two reasons. First, because the Court determined that the bylaw provisions were drafted and made effective contemporaneous with the provisions in the charter regarding advancement rights. Second, both documents were in effect when Xu began his service as a director and he should have been aware of the advancement provisions when he began his service as a director.

The Court observed that there was no requirement in Delaware law that all of the terms regarding advancement rights to which a person is entitled must be in one document. To the contrary, no such authority was presented to the Court.

Moreover, in light of Xu previously prevailing on Count III of Heckmann's counterclaims, the Court granted summary judgment in his favor for indemnification with respect to Count III.

However, the Court denied a request for 'fees on fees' in the instant advancement proceedings because Xu did not prevail on his pending claim for advancement to the extent that the Court upheld the arguments of Heckmann on the issue of conditions precedent to advancing fees, contrary to the position argued by Xu--the net effect of which was to allow Heckmann to impose reasonable conditions prior to granting advancement rights.

Procedural Commentary

The Court observed as a procedural matter that fee advancement actions are especially appropriate for summary judgment proceedings because the entitlement of a party to advancement can be determined by applying the allegations contained in the pleadings to relevant corporate documents. Likewise, indemnification is also appropriate at the summary judgment stage where there are no material factual disputes germane to indemnification.
                                                                              

Full post as published by Delaware Corporate and Commercial Litigation Blog on January 12, 2010 (boomark / email).