Former CEO Breached His Duty Of Loyalty But Still Wins Partial Indemnification

Sep 29, 2021

September 29, 2021

The Court of Chancery ordered a Delaware corporation, Avande, Inc., to indemnify its former CEO, Shawn Evans, for certain fees Evans incurred in a prior action that held him liable to Avande for $65,000 because he breached the duty of loyalty, engaged in self-dealing, and acted in bad faith.  Evans v. Avande, Inc., C.A. No. 2018-0454-LWW (Del. Ch. Sep. 23, 2021).  In the prior action, Avande brought a claim for breach of fiduciary duty along with four other claims.  After trial, Avande did not brief the four other claims, and so the Court held they were waived.  Evans is now seeking indemnification for amounts he incurred in defending the prior action.

In its September 23rd memorandum opinion, the Court of Chancery granted Evans summary judgment in part, holding that Avande owed Evans mandatory indemnification in connection with two of the four waived claims.  The Court held that indemnification is mandatory under the Delaware General Corporation Law if a former director or officer is successful “on the merits or otherwise” on a claim that was made “by reason of the fact” of that person’s corporate service.  Evans made the novel argument that he partially succeeded on the fiduciary duty claim because he was held liable for only a fraction of the roughly $5.4 million that Avande sought to obtain from him for the breach of fiduciary duty.  The Court rejected this argument, at least at the summary judgment stage.  With regard to the waived claims, the Court held Evans had succeeded—not on the merits, but “otherwise.”  Two of the waived claims were “by reason of the fact” of his corporate service:  a declaratory judgment claim that Evans was no longer the CEO; and a claim for conversion premised on alleged improper retention of confidential information.  The Court ruled Avande must indemnify Evans for fees incurred in connection with these claims.  The other two waived claims, for tortious interference and defamation, focused on the falsity of statements Evans made after his termination.  The Court held that summary judgment could not be granted in Evans’ favor on these claims because Evans could not sufficiently demonstrate a connection to his former service as CEO.  Finally, Evans sought fees-on-fees for the indemnification action and the Court granted them proportionately to his success.

In light of this decision, Evans is entitled to indemnification in connection with two claims and fees-on-fees on those claims, with the amounts to be determined later.  Likewise, whether Evans is entitled to indemnification on the other claims will be resolved at trial.  In a footnote, the Court cautioned that “adjudication will undoubtedly require an onerous inquiry into the underlying action for what would likely be of limited value to Evans.”

Content contributed by Dailey LLP Court of Chancery litigator, Andrew Sauder. To learn more about Andrew and our Court of Chancery practice click here.