Mark S. Davis v. EMSI Holding Company
CA 12854-VCS
| Del. Ch. | May 3, 2017Background
- Plaintiffs Mark S. Davis and Robert P. Brook are former officers/directors of EMSI Holding Company; EMSI Acquisition, Inc. (Buyer) acquired EMSI under a Stock Purchase Agreement (SPA) and later sued Plaintiffs for indemnification based on alleged accounting fraud tied to the Acquisition.
- EMSI Holding Company bylaws (Article VII, §7.1) provide indemnification and expressly include advancement of defense expenses (attorneys’ fees) as part of indemnification.
- The SPA contains a broad release (Section 6.5) of claims by Sellers but carves out "any right to indemnification . . . under the Governing Documents of the applicable EMSI Entity."
- The SPA also contains a "sole and exclusive remedy" clause for SPA breaches (Section 10.10(a)) and a provision stating each party pays its own transaction-related expenses except as otherwise expressly provided (Section 12.3).
- Buyer sued Plaintiffs for indemnification/repayment tied to alleged fraud (damages ~ $40M); Plaintiffs demanded advancement of defense costs, defendant refused, and Plaintiffs moved for summary judgment on advancement and fees-on-fees.
- The Court considered whether the SPA waived advancement, whether the carve-out preserved advancement, whether the claims were brought "by reason of" Plaintiffs' officer/director status, and whether Plaintiffs perfected their demand.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether SPA waived advancement rights | SPA carve-out (§6.5) preserves indemnification under governing documents, which includes advancement | SPA's "sole and exclusive remedy" and §12.3 (each bears own costs) show parties waived advancement post-closing | Court: No waiver; §10.10(a) limits remedies for prosecuting SPA claims, not an extra-contractual advancement asserted in defense; §12.3 is subject to express carve-outs elsewhere in SPA |
| Whether §6.5 carve-out preserves advancement (not just indemnification) | §6.5 saves "any right to indemnification . . . under the Governing Documents," and EMSI Holding bylaws define indemnification to include advancement | Carve-out preserves only ultimate indemnification for successful claims, not advancement; different entities' governing docs differ | Court: Carve-out preserves advancement because the governing bylaws (EMSI Holding) treat indemnification to include advancement; similar to Sodano reasoning |
| Whether underlying claims were brought "by reason of" Plaintiffs' officer/director status | The allegations center on misuse of corporate powers and fraudulent manipulation while acting as officers/directors, so advancement applies | Claims framed as breaches of contractual/seller obligations — akin to Cochran — thus not by reason of corporate office | Court: Claims have nexus to official capacity (use of corporate powers); advancement required; Cochran limited to narrow personal-contract obligations |
| Whether Plaintiffs perfected demand; entitlement to fees-on-fees and prejudgment interest | Demand was proper; Defendant denied any entitlement so detailed invoices were unnecessary; prevailing party entitled to fees-on-fees and prejudgment interest from demand date | Demand lacked specific amounts; thus technical defect should bar recovery now | Court: Demand was sufficient; Plaintiffs entitled to advancement, fees-on-fees, and prejudgment interest; procedures to resolve amounts to follow |
Key Cases Cited
- Homestore, Inc. v. Tafeen, 888 A.2d 204 (Del. 2005) (test for when a claim is brought "by reason of" corporate office—requires nexus to official capacity)
- Paolino v. Mace Sec. Intern., Inc., 985 A.2d 392 (Del. Ch. 2009) (advancement entitlement turns on pleadings; narrow contractual obligations without nexus to duties are not advanceable)
- Cochran v. Stifel Financial Corp., 809 A.2d 555 (Del. 2002) (distinguishes personal contractual obligations from official-capacity claims for indemnification; narrow rule applied)
- VonFeldt v. Stifel Fin. Corp., 714 A.2d 79 (Del. 1998) (courts should avoid hyper-technical rules that frustrate statutory advancement policy)
- Marino v. Patriot Rail Co., 131 A.3d 325 (Del. Ch. 2016) (scope of advancement rights normally determined by underlying pleadings)