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Davis v. Emsi Holding Co.

Court of Chancery of Delaware

May 3, 2017

MARK S. DAVIS and ROBERT P. BROOK, Plaintiffs,

          Date Submitted: February 8, 2017

          Philip Trainer, Jr., Esquire and Toni-Ann Platia, Esquire of Ashby & Geddes, Wilmington, Delaware; Lisa C. Solbakken, Esquire of Arkin Solbakken LLP, New York, New York; and Timothy D. Kelly, Esquire of Dykema Gossett, PLLC, Minneapolis, Minnesota, Attorneys for Plaintiffs.

          S. Mark Hurd, Esquire, Ryan D. Stottmann, Esquire, and Lauren K. Neal, Esquire of Morris, Nichols, Arsht & Tunnell LLP, Wilmington, Delaware and Stephen C. Hackney, Esquire and Timothy Knapp, Esquire of Kirkland & Ellis LLP, Chicago, Illinois, Attorneys for Defendant.


          SLIGHTS, Vice Chancellor Judge.

         In this advancement action, two former directors and officers of a recently acquired corporation, EMSI Holding Company ("EMSI" or the "Company"), seek payment of attorney's fees and expenses they have incurred, and will incur, in defending themselves in a separate action pending before this Court. In the underlying action, the Plaintiffs here and others have been sued for indemnification arising out of allegedly fraudulent misrepresentations they made in a Stock Purchase Agreement (the "SPA"). Plaintiffs have made a demand for advancement. Defendant has refused that demand and argues that Plaintiffs waived their right to advancement in the SPA by agreeing that contractual indemnification was the only remedy that would survive the closing of the transaction. Alternatively, Defendant contends that Plaintiffs' right to advancement was not clearly established prior to the SPA and, in any event, Plaintiffs have not been sued by reason of the fact that they were directors or officers of the Company.

         In this opinion, I grant Plaintiffs' motion for summary judgment on their claims for mandatory advancement and fees on fees. I do so because the SPA clearly preserves Plaintiffs' preexisting right to advancement and the claims they are defending in the underlying indemnification action arise by reason of the fact they were directors or officers of EMSI. None of Defendant's arguments to the contrary survive construction of the clear and unambiguous terms of the SPA and the applicable governance documents.

         I. BACKGROUND

         Plaintiffs have moved for summary judgment in advance of discovery arguing that the complaint in the underlying indemnification action, the clear terms of the SPA and the clear terms of the applicable corporate bylaws demonstrate that they are entitled to advancement as a matter of law. Defendant has sought to expand the record under Court of Chancery Rule 56(f). As will be discussed below, I am satisfied that the facts that can be drawn from the pleadings in the underlying indemnification action and the operative documents reveal that Plaintiffs' motion is well-grounded as is the relief they seek here.[1]

         A. The Parties and Relevant Non-Parties

         Plaintiffs, Mark S. Davis and Robert P. Brook, are former directors and officers of EMSI. Davis was President, CEO and Chairman of the board of directors. Brook was a director and Executive Vice President of EMSI and President of its HealthCare Division.

         Defendant, EMSI, is a Delaware corporation. Non-party EMSI Acquisition, Inc. (the "Buyer") is a Delaware corporation that acquired EMSI through the SPA (the "Acquisition") and subsequently sued Plaintiffs in the underlying action for fraud in connection with that transaction.

         B. The Underlying Action

         The factual allegations of the underlying action are complex. A thorough discussion of these facts appears in the Court's opinion on defendants' motion to dismiss that action which has been issued simultaneously with this opinion.[2] An abridged version will suffice to provide context to Plaintiffs' demands for advancement.

         Plaintiffs and others have been sued by the Buyer for indemnification and to confirm a Settlement Auditor's award related to post-closing net working capital and revenue adjustments. The Buyer bases its claim for indemnification on what it alleges was a multi-faceted accounting fraud that arose in connection with the Acquisition. Essentially, the Buyer avers that, in an effort to keep the Buyer engaged in the sales process and to extract from the Buyer more than EMSI was actually worth, EMSI fraudulently inflated financial statements in order to hide the effects of a dramatic slowdown in revenue and profitability that it experienced in the ramp up to closing of the Acquisition. To accomplish this complex and brazen fraud, EMSI purportedly engaged in a variety of different types of financial manipulation that created over $4.6 million of fabricated EBITDA. The Buyer alleges that Davis and Brook knowingly participated in this financial fraud through their positions at EMSI. Damages to the Buyer are alleged to be approximately $40 million.

         C. The Company's Bylaws and the Relevant Provisions of the SPA

         The documents that are relevant to resolving the dispute over Plaintiffs' right to advancement are the EMSI Holding Company bylaws and the SPA. To begin, Section 7.1 of the bylaws states, in relevant part:

Each person who was or is made a party or is threatened to be made a party to or otherwise is involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (a "Proceeding"), by reason of being or having been a director or officer of the Corporation or serving or having served at the request of the Corporation as a director, trustee, officer, employee or agent of another corporation . . . whether the basis of such proceeding is alleged action or failure to act in an official capacity as a director, trustee, officer, employee or agent or in any other capacity while serving as a director, trustee, officer, employee or agent, shall be indemnified and held harmless by the Corporation to the fullest extent authorized by the DGCL . . . against all expense, liability and loss (including attorneys' fees, judgements, fines, ERISA excise taxes or penalties and amounts paid in settlement) reasonably incurred or suffered by such Indemnitee in connection therewith . . . . The right to indemnification conferred in this Article VII shall be a contract right and shall include the right to be paid by the Corporation the expenses (including attorneys' fees) incurred in defending any such Proceeding in advance of its final disposition (an "Advancement of Expenses"); provided, however, that, if the DGCL so requires, an Advancement of Expenses incurred by an Indemnitee shall be made only upon delivery to the Corporation of an undertaking (an "Undertaking"), by or on behalf of such Indemnitee, to repay all amounts so advanced if it shall ultimately be determined by final judicial decision from which there is no further right to appeal (a "Final Adjudication") that such Indemnitee is not entitled to be indemnified for such expenses under this Article VII or otherwise.[3]

         In connection with the Acquisition, Plaintiffs and others agreed to release certain claims they may have possessed against the Company. Specifically, Section 6.5 of the SPA states, in relevant part:

Effective immediately following the Closing, the Sellers, on their own and on behalf of their respective Affiliates . . . (collectively, the "Releasing Parties") hereby completely, unconditionally, and irrevocably forever release, waive, and discharge, and shall be forever precluded from asserting, any and all claims, obligations, suits, judgments, damages, demands, debts, rights, causes of action, and liabilities, of any kind or nature . . . then existing in law, equity, or otherwise, that the Releasing Parties has, had, or may have against the EMSI Entities, Buyer and the Receiving Party . . . (collectively, the "Released Parties") . . .[4]

         Section 6.5 also contains certain carve-out language with respect to the Release:

Nothing contained in this Section 6.5 shall (a) affect any right to indemnification that any Releasing Party has, in his or her capacity as an officer or director (or former officer or director), under the Governing Documents of the applicable EMSI Entity . . .[5]

         The proper construction of these provisions, and how they fit together either to preserve Plaintiffs' right to advancement or to waive that right, is at the heart of this dispute.

         D. Procedural History

         The Buyer commenced the underlying action on August 10, 2016. Defendants filed a motion to dismiss that action which was, by separate opinion and order issued today, denied. Plaintiffs filed their Verified Complaint (the "Complaint") for advancement on October 27, 2016. On November 23, 2016, Plaintiffs filed their motion for summary judgment.

         II. ANALYSIS

         Defendant contends that, through their request for advancement, Plaintiffs are attempting an end-run around the heavily negotiated provisions of the SPA. Defendant makes two principal arguments in support of this contention. First, Plaintiffs expressly waived their advancement rights in the SPA. Second, even if Plaintiffs did not waive their right to advancement in all instances, they have nevertheless failed to preserve that right for claims that arise under the SPA. Defendant also insists that, regardless of the terms of the SPA, Plaintiffs are not entitled to advancement because none of the claims in the underlying action have been brought against them by reason of the fact that they were officers and directors of EMSI.[6] For reasons I explain below, none of these arguments are persuasive.

         A. Summary Judgment Standard

         Summary judgment is appropriate when "there is no genuine issue as to any material fact and . . . the moving party is entitled to a judgment as a matter of law."[7]Evidence must be "viewed in the light most favorable to the non-moving party."[8]"When the issue before the Court involves the interpretation of a contract, summary judgment is appropriate only if the contract in question is unambiguous."[9] In other words, to prevail, Plaintiffs as the moving party "must establish that [their] construction is the only reasonable interpretation."[10] Summary judgment is a particularly efficient method of resolving advancement disputes because "the relevant question turns on the application of the terms of the corporate instruments setting forth the purported right to advancement and the pleadings in the proceedings for which advancement is sought."[11]

         B. Plaintiffs Are Entitled to Advancement Under the SPA as a Matter of Law

         I address Defendant's arguments against advancement in the order they raise them: (1) the right has been waived; (2) the right did not exist or was not preserved; or (3) the right is not available here since Plaintiffs have not been sued by reason of having been a director or officer of the Company.

         1. The SPA Does Not Reflect a Bargained-For Waiver of Advancement

         Defendant argues that Plaintiffs waived their right to advancement in two clear and unambiguous provisions of the SPA. First, Defendant highlights Article X of the SPA, specifically Section 10.10(a), which states, in part, that "the sole and exclusive remedy . . . for any breach or inaccuracy, or alleged breach or inaccuracy, of any representation, warranty or covenant under, or for any other claims arising in connection with, any of the Transaction Documents . . . shall be indemnification in accordance with this Article X" and "Sellers waive, release, and agree not to assert . . . to the fullest extent permitted by applicable Law, all other remedies, whether common law or statutory or at equity."[12] Defendant contends that the remedy sought in this action, advancement, is one of the "other remedies" that Plaintiffs expressly waived. Second, Defendant points to Section 12.3 of the SPA and argues that this provision "made clear the parties would bear their own costs and expenses associated with the performance and enforcement of the SPA."[13] Section 12.3 reads: "Except as otherwise expressly provided for in this Agreement, each party hereto shall pay its own expenses and costs relating to the negotiation, execution and performance of the Transaction Documents and the transactions contemplated thereby." Neither of the provisions Defendant has plucked from the SPA reveal that the parties agreed that Plaintiffs would enjoy no right to advancement post-closing.

         For its part, Section 10.10(a) is clearly directed at limiting the remedies that an indemnified party can assert when prosecuting claims arising under the SPA. It is true, as Defendant argues, that Section 10.10(a), standing alone, appears to provide that the sole and exclusive remedy of the indemnified parties for a breach the SPA shall be indemnification and that the parties waive, release and will not assert all other remedies. But Defendant's construction of the "waiver" clause as a standalone waiver of all other remedies that may be available to the parties, including extra-contractual remedies, regardless of the nature of the claims or specific litigation posture of the parties, does not line up with what the parties actually said.

         The first clause of Section 10.10(a) clearly and unambiguously states that the indemnified parties have agreed that, in any action between them for any breach of a representation or warranty or for any other claims arising under the agreement, the sole and exclusive remedy will be contractual indemnification. The second clause of Section 10.10(a) accents that limitation by expressly stating that remedies other than the agreed upon contractual indemnification will not be asserted in connection with any action arising under the SPA. What that provision does not address, however, is a situation, like here, where a claim for contractual indemnification has been brought and the party being sued is asserting an extra-contractual right in the context of defending that claim. Indeed, nothing in that provision ...

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