THOMAS A. RIZK and JOHN A. DOUGLAS, Plaintiffs,
TRACTMANAGER, INC., a Delaware Corporation, Defendant.
Date Submitted: March 12, 2014
Rudolf Koch, Esquire and A. Jacob Werrett, Esquire of RICHARDS, LAYTON & FINGER, P.A., Wilmington, Delaware; OF COUNSEL: Peter R. Bray, Esquire of BRAY & BRAY, LLC, Parsippany, New Jersey; Andrew J. Levander, Esquire and David A. Kotler, Esquire of New York, New York; Attorneys for Plaintiffs.
Kenneth J. Nachbar, Esquire, Megan Ward Cascio, Esquire and Frank Martin, Esquire of MORRIS, NICHOLS, ARSHT & TUNNELL, LLP, Wilmington, Delaware; OF COUNSEL: Troy S. Brown, Esquire and Jeffrey A. Sturgeon, Esquire of MORGAN LEWIS & BOCKIUS, LLP, Philadelphia, PA 19103; Attorneys for Defendant.
MASTER'S REPORT (Cross-Motions for Summary Judgment)
Abigail M. LeGrow Master in Chancery
The advancement disputes that reach this Court often begin to take on a quality reminiscent of the late Harold Ramis's comedic masterpiece, "Groundhog Day." Although the arguments change slightly, and companies occasionally seize upon novel arguments to advance their ultimate goal of avoiding their contractual obligations, the plot rarely shifts: a company that granted its directors and officers broad indemnification and advancement rights in bylaws or employment agreements seeks to avoid the consequences of that promise when a director or officer is accused of serious wrongdoing that allegedly injured the company.
Such is the case here. Although the defendant company argues that the plaintiffs - its former officers - are not entitled to advancement because the underlying litigation does not involve actions the plaintiffs took in their official corporate capacity, the company's briefs reveal its real position: that Delaware's public policy "is contravened when advancement is provided to an individual who has undertaken serious financial wrongdoing and other misconduct to further his own interests, contrary to the best interests of the company." This argument, of course, ignores one important procedural fact: the plaintiffs have been accused of wrongdoing, but the underlying litigation is ongoing and the plaintiffs are entitled to defend themselves against those allegations with the benefit of the advancement rights granted by the company they served. That result is wholly consistent with, and in fact required by, the public policy of this State, a conclusion repeatedly confirmed in decisions of this Court and the Delaware Supreme Court.
Except as noted, the background facts are not in dispute. As is typical in advancement cases, the parties steadfastly disagree about the truth of the factual allegations in the underlying litigation, but the plaintiffs' right to advancement does not turn on a resolution of those disputed facts, but rather on the contractual rights granted to the plaintiffs under the defendant's bylaws and application of those rights to the claims asserted in the underlying litigation.
A. The Parties
Thomas A. Rizk ("Rizk") founded the defendant TractManager, Inc. ("TMI" or the "Company") in 2000 and served as its CEO and a director of the Company until April 5, 2013. Rizk also served as an officer or director of several entities affiliated with TMI. John A. Douglas ("Douglas") served as TMI's Chief Information Officer ("CIO") from May 2011 until April 5, 2013. Rizk and Douglas are the plaintiffs ("Plaintiffs") in this advancement action. TMI is a Delaware corporation with its principal place of business in Saddle Brook, New Jersey. TMI provides contract management services in the healthcare industry and utilizes proprietary technology and applications developed by the Company.
B. The Joint Venture
In 2010, TMI began operating internationally through a joint venture (the "Joint Venture") with SCG Limitless International GP Inc. ("SCG"), whose members include Rizk's son, Geoffrey Rizk ("Geoffrey"), Prince Emir Saud Bin Abdul Azziz Bin Majid Al Saud, and Celestino Diaz, a Venezuelan national. The Joint Venture was formed to explore business opportunities in certain foreign countries. TractManager International GP Inc. ("TMI International GP") is the managing general partner of the Joint Venture and is controlled by TMI. Rizk was the initial CEO of TMI International GP.
C. Arsenal's Investment in TMI
In December 2012, Arsenal Capital Partners ("Arsenal") entered into a merger whereby Arsenal acquired majority ownership of TMI (the "Merger"). Arsenal is a private equity firm that invests in middle-market companies. After the Merger, TMI became wholly-owned by TractManager Holdings LLC ("Holdings"), in which Arsenal controls a majority stake. In connection with the Merger, some of TMI's stockholders sold their entire interest in the Company to Arsenal, while others – including Rizk – sold some of their stock but retained an investment in the Company when their interests were converted in the Merger into membership units of Holdings.
As a result of the Merger, Arsenal has the right to appoint three of TMI's four directors, with each Arsenal director having two votes. The minority stockholders designated Rizk as their representative on TMI's board of directors. The minority stockholders' board designee holds one vote.
D. Plaintiffs' Termination from TMI
After the Merger, Rizk and Douglas continued in their positions as CEO and CIO, respectively, of TMI, and signed employment agreements with TMI dated December 19, 2012 (the "Employment Agreements"). In the litigation now pending in New Jersey, TMI alleges that - shortly after taking control of the Company - the three directors appointed by Arsenal discovered "serious improprieties" in the Company's recordkeeping and expenses, particularly relating to the Joint Venture. TMI contends in the New Jersey litigation that the monthly expenses for the Joint Venture outpaced revenue by approximately 600%, and the Joint Venture's results were markedly different from the budget and projections provided to Arsenal in connection with the Merger negotiations. Arsenal also learned through investigation and discussions with TMI employees that Geoffrey Rizk and his partners in SCG had been issued TMI credit cards and routinely incurred substantial charges on questionable activities, including tens of thousands of dollars incurred in a three-month period at restaurants, bars, and nightclubs in New York City, Las Vegas, Miami, and Park City, along with payments to an unknown woman. 
On April 5, 2013, at a telephonic meeting of TMI's board, TMI terminated Rizk and Douglas from their employment with the Company. TMI stated that the termination was "for cause, by reason of „willful misconduct, acts of dishonesty, malfeasance and material breaches of [Rizk's and Douglas's] responsibilities to the company and its shareholders … .'" TMI also required Rizk to resign as CEO of TractManager International GP, and there is a dispute between the parties about whether Rizk resigned from that position in a timely manner.
E. The First New Jersey Action
On April 10, 2013, Rizk, Douglas, and several other individuals and entities filed a complaint against TMI, its directors, and other individuals and entities in New Jersey state court (the "First New Jersey Action"). Among other things, the complaint in the First New Jersey Action alleges Rizk and Douglas improperly were terminated from TMI. On June 17, 2013, TMI and certain other defendants filed an answer to the second amended complaint in the New Jersey Action, along with a series of counterclaims against Rizk, Douglas, and the other plaintiffs (the "New Jersey Counterclaims").
In all, the New Jersey Counterclaims assert nine claims against various plaintiffs. As described above, TMI alleges that, after the Merger, the directors appointed by Arsenal discovered significant issues at the Company, primarily relating to the Joint Venture, including expenses that substantially outpaced revenue and a culture in which Geoffrey and some of his SCG associates lived an extravagant lifestyle largely financed by TMI. More significantly for purposes of this advancement action, the New Jersey Counterclaims allege that this pattern of Geoffrey and his associates incurring expenses on the Company's credit cards for costs unrelated to TMI's business was authorized and enabled by Rizk. TMI alleges Rizk directed that Company credit cards be issued to his son and his friends and told other TMI executives that Geoffrey was their boss and "going against his wishes was a 'fireable offense.'" TMI also alleges that Rizk improperly allocated to the Company ...