IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
DOV CHARNEY, )
)
Plaintiff, )
)
v. ) C.A. No. 11098-CB
)
AMERICAN APPAREL, INC., )
)
Defendant. )
MEMORANDUM OPINION
Date Submitted: July 8, 2015
Date Decided: September 11, 2015
Stephen B. Brauerman, Vanessa R. Tiradentes and Sara E. Bussiere of BAYARD, P.A.,
Wilmington, Delaware; Attorneys for Plaintiff.
Stephen C. Norman of POTTER ANDERSON & CORROON LLP, Wilmington,
Delaware; Attorneys for Defendant.
BOUCHARD, C.
Plaintiff Dov Charney is the founder and former Chairman and Chief Executive
Officer of American Apparel, Inc. (the “Company”). In June 2014, he was suspended
from his CEO position. In July 2014, he entered a Nomination, Standstill and Support
Agreement (the “Standstill Agreement”) and resigned as a director of the Company. In
December 2014, Charney was formally terminated as CEO for cause. In May 2015, the
Company sued Charney in this Court (C.A. No. 11033-CB) for allegedly breaching the
Standstill Agreement (the “Standstill Proceeding”).
In this action, Charney seeks to have the Company advance his legal expenses
incurred in mounting his defense in the Standstill Proceeding. The parties cross moved
for summary judgment over whether Charney is entitled to advancement for the Standstill
Proceeding under the Company’s charter and his Indemnification Agreement. In this
opinion, I conclude that he is not.
The most significant legal issue raised by the cross motions is the meaning of the
advancement provision in the Indemnification Agreement, which mandates advancement
for events or occurrences “related to the fact” that Charney is or was a director or officer
of the Company. For the reasons explained below, I construe this phrase as used in the
Indemnification Agreement to be equivalent to the phrase “by reason of the fact” found in
Section 145 of the Delaware General Corporation Law, which requires a nexus or causal
connection between the claims in the underlying proceeding and one’s official corporate
capacity to obtain advancement. Construed as such, Charney is not entitled to
advancement for the claims asserted in the Standstill Proceeding because none of them
implicate his use or abuse of corporate power as a fiduciary of American Apparel.
1
I also find that, because the Company’s charter mandates advancement only for
current directors and current officers, Charney is not entitled to advancement under the
charter for the additional reason that he was neither a current director nor a current officer
when he was sued in the Standstill Proceeding in May 2015.
I. BACKGROUND 1
A. The Parties
Plaintiff Dov Charney, a California resident, is the founder and former Chairman
and Chief Executive Officer (CEO) of American Apparel, Inc. He is the beneficial owner
of approximately 42.3% of the Company. Charney and the Company are parties to an
Indemnification Agreement dated as of March 6, 2008 (the “Indemnification
Agreement”), and an Employment Agreement effective as of April 1, 2012 (the
“Employment Agreement”).
Defendant American Apparel, Inc., a Delaware corporation based in Los Angeles,
California, is a vertically integrated clothing designer, manufacturer, and retailer.
Non-party Standard General L.P. (“Standard General”) is a New York-based
investment firm.
1
The facts are drawn from the pleadings and exhibits submitted in support of the parties’
cross motions for summary judgment. In re Orchard Enters., Inc. Stockholder Litig., 88
A.3d 1, 8 (Del. Ch. 2014).
On September 9, 2015, the Court entered an order approving the substitution of Potter
Anderson & Corroon LLP for Skadden, Arps, Slate, Meagher & Flom LLP, the
Company’s former counsel in this action, which briefed and argued the cross-motions for
summary judgment.
2
B. The Company Suspends Charney as CEO
Charney contends that, by June 2014, the Company’s Chief Financial Officer,
John J. Luttrell, and several of the Company’s directors had implemented a plan to oust
him from American Apparel. The Company vigorously denies these allegations, the truth
of which is not necessary to resolve the present cross-motions.
On June 18, 2014, at a regular meeting of the Company’s board of directors, Allan
Mayer, an American Apparel director, hand delivered a letter to Charney notifying him of
the board’s intention to terminate him for cause under his Employment Agreement. The
letter immediately suspended Charney as American Apparel’s President and CEO:
Effective immediately, you [Charney] will be relieved of all of your
job duties and obligations, including as President and Chief Executive
Officer; your power to act on the Company’s behalf is hereby suspended.
During your suspension, you shall not, on behalf of the Company, negotiate
or enter into contracts, disburse funds, make any statements on the
Company’s behalf to the press, public or vendors . . . , attempt to
communicate with current employees or former employees with continuing
contractual obligations to the Company . . . , or disrupt or interfere in any
way with the Company’s operations. . . . You also remain subject to
continuing obligations under federal securities laws . . . and continuing
fiduciary duties under state law. 2
According to the meeting minutes, the board suggested a willingness to accept Charney’s
resignation under proposed separation documents, but Charney refused to resign. 3
After excusing Charney from the meeting, the remaining directors unanimously
resolved to suspend him as CEO, to revoke his authority to act for or on behalf of the
2
Def.’s Ex. 4 at 3-4.
3
Def.’s Ex. 3 at 1.
3
Company, and to remove him from his position as Chairman of the board. Specifically,
the board’s resolution provided:
[E]ffective immediately and until such suspension has been lifted or Mr.
Charney has been terminated, Mr. Charney shall have no further authority
or responsibility as an officer or agent of the Company, whether as Chief
Executive Officer, President or otherwise.
...
[E]ffective immediately, any and all power, authority or direction
previously granted to Mr. Charney to act for or on behalf of the Company
. . . is hereby revoked.
...
[E]ffective immediately, Mr. Charney is hereby removed as the Chairman
of the Board and shall have no further authority or responsibility as the
Chairman of the Board, but such removal shall have no effect on Mr.
Charney’s position as a member of the Board. 4
The board subsequently appointed Luttrell to be the Company’s Interim CEO.
On June 19, 2014, the Company filed a Form 8-K with the Securities and
Exchange Commission (“SEC”) disclosing these developments. On June 23, 2014,
Charney filed a Schedule 13D with the SEC acknowledging his suspension. Around this
time, Charney entered into an agreement with Standard General (acting on behalf of its
funds) providing for a financing transaction to acquire additional American Apparel stock
and an arrangement governing the voting control of the additional stock and Charney’s
original stock. 5
4
Def.’s Ex. 3 at A-1 to A-2.
5
Def.’s Ex. 7 at Item 3, Ex. A.
4
On June 27, 2014, Charney purported to call a special meeting of the Company’s
stockholders to, among other proposed actions, expand the size of the board and elect
individuals to those newly created directorships. That same day, a committee of the
American Apparel board adopted a one-year stockholder rights plan with a 15% trigger.
C. The Standstill Agreement
On July 9, 2014, three weeks after his suspension as American Apparel’s CEO,
Charney, the Company, and Standard General (and several of its affiliates) entered into
the Standstill Agreement. Broadly speaking, the Standstill Agreement constrained
Charney’s ability to run a proxy contest by contractually preventing Charney from acting
to replace directors and from disparaging the Company. For example, Section 3(c) of the
Standstill Agreement prohibits Charney from taking certain actions, including seeking the
removal of any member of the American Apparel board, until completion of the
Company’s 2015 annual meeting, and Section 6(b) prohibits Charney from making any
statement to any third party that “disparages or otherwise negatively reflects upon the
Company.” 6
The Standstill Agreement also governed whether Charney could return to the
Company as CEO. Section 5 sets forth the process by which a committee of the
American Apparel board (the “Suitability Committee”) would conduct an investigation of
the alleged misconduct that led to Charney’s suspension. Following its investigation, the
Suitability Committee would make a determination whether it was appropriate for
6
Def.’s Ex. 1 (Standstill Agreement) at §§ 3(c), 6(b).
5
Charney to be reinstated as CEO. Section 5 further provided that, in the interim, Charney
would serve as a consultant to the Company, not as an officer or employee:
Charney shall not serve as CEO of the Company or serve as an
officer or employee of the Company or any of its subsidiaries unless and
until the Investigation is completed and the Suitability Committee makes a
Clearance Determination in favor of such service. From the date hereof
through the date of the Clearance Determination, Charney shall serve as a
consultant to the Company with no supervisory authority over any
employees of the Company. 7
Separate counsel represented each of the three primary parties to the Standstill
Agreement (Charney, the Company, and Standard General) 8 and Charney signed the
agreement in his personal capacity without reference to any corporate affiliation.
In accordance with Section 1(a) of the Standstill Agreement, Charney resigned as
a director of the Company effective ten days after the Company filed a Schedule 14F-1
Information Statement with the SEC. The Company filed that Information Statement on
July 23, 2014. 9
On December 16, 2014, following the Suitability Committee’s investigation, the
American Apparel board terminated Charney’s employment with the Company. In doing
7
Def.’s Ex. 1 (Standstill Agreement) at § 5(d).
8
Charney was represented by Glaser, Weil, Fink, Howard, Avchen & Shapiro LLP; the
Company was represented by Skadden, Arps, Slate, Meagher & Flom LLP; and Standard
General was represented by Debevoise & Plimpton LLP.
9
American Apparel, Inc., Information Statement (Schedule 14F-1) (July 23, 2014). I
take judicial notice of the date of this SEC filing. See In re Gen. Motors (Hughes)
S’holder Litig., 897 A.2d 162, 170-71 (Del. 2006).
6
so, the board determined that Charney’s misconduct constituted cause to terminate him
under his Employment Agreement. 10
D. The Standstill Proceeding
On May 15, 2015, the Company filed the Standstill Proceeding against Charney in
this Court alleging that he had violated the Standstill Agreement. In addition to several
generalized allegations about Charney’s conduct, the Company specifically alleged that
Charney had taken the following actions in violation of the Standstill Agreement:
• According to a December 18, 2014, Bloomberg article, Charney was
discussing a potential takeover of the Company with Irving Place Capital,
a private equity firm, in violation of Section 3(e), which prohibits him
from publicly proposing or participating in any extraordinary corporate
transaction, and Section 3(f), which prohibits him from purchasing or
causing to be purchased any shares of American Apparel stock. 11
• Charney participated in American Apparel employee meetings in or about
May 2015, and expressed anti-board sentiments at those meetings in
violation of Section 3(a)(ii), which prohibits him from advising,
encouraging, or influencing any person with respect to voting shares of
American Apparel stock. 12
• In articles published by the Los Angeles Times, LA Weekly, and BuzzFeed
in April 2015, Charney had made negative statements about the Company
in violation of Section 6(b), which prohibits him from publicly disparaging
the Company. 13
• On May 1, 2015, in connection with a lawsuit seeking to invalidate the
director election results of the Company’s 2014 annual meeting, Charney
10
Def.’s Ex. 9; Answer ¶ 16.
11
Pl.’s Ex. A (Standstill Proceeding Complaint) ¶¶ 65-72.
12
Id. ¶¶ 58-64.
13
Id. ¶¶ 73-80.
7
submitted a declaration in support of the plaintiff’s motion for a
preliminary injunction in violation of Sections 3(c) and 3(h), which
prohibit him from directly or indirectly assisting a third party in seeking to
remove American Apparel directors. 14
The Company’s complaint in the Standstill Proceeding asserts claims for breach of
contract and breach of the implied covenant of good faith and fair dealing.
On May 21, 2015, the Company moved for a temporary restraining order against
Charney. In briefing that motion, the Company submitted an affidavit from Paula
Schneider, the current CEO of American Apparel, regarding a May 21, 2015,
conversation she had had with Ilse Metchek, a mutual friend of hers and Charney’s. As
reflected in her affidavit, Schneider’s impression from her conversation with Metchek
was that “Charney was actively encouraging potential candidates to run on a slate of
directors that would represent his interest in connection with the 2015 annual meeting.”15
According to the Company, this conduct violated Sections 3(a), 3(b), and 3(c) of the
Standstill Agreement, which generally prohibit Charney from supporting a third party in
soliciting proxies and proposing a nominee for election to the board.
On June 1, 2015, after briefing and oral argument, I granted the Company’s
motion for a temporary restraining order. On June 8, 2015, I granted the parties’
stipulated order extending the relief provided by the temporary restraining order until the
conclusion of the Company’s 2015 annual meeting, which was held on July 16, 2015.
14
Id. ¶¶ 50-57; Def.’s Op. Br. 11-12.
15
Pl.’s Ex. P (Schneider Aff.) ¶ 7.
8
E. The Company Denies Charney’s Demand for Advancement
By email dated May 23, 2015, Charney made a demand on the Company under the
Indemnification Agreement, the Employment Agreement, and the Company’s bylaws for
advancement of his attorneys’ fees and expenses incurred in connection with the
Standstill Proceeding. Charney’s demand included an undertaking to repay if it is
ultimately determined that he is not entitled to indemnification. 16 By letter dated May 26,
2015, the Company, through its counsel, denied Charney’s advancement demand. 17
F. Procedural History
On June 4, 2015, Charney filed a Verified Complaint for Advancement, asserting
two claims for relief: (i) advancement for his attorneys’ fees and expenses incurred in
connection with the Standstill Proceeding under the Indemnification Agreement, the
Employment Agreement, and the Company’s bylaws (Count I); and (ii) indemnification
for his attorneys’ fees and expenses incurred in connection with this action under the
Indemnification Agreement and applicable law (Count II). On June 12, 2015, the
Company filed its Answer.
On June 19, 2015, the parties cross moved for summary judgment. Charney
contends he is entitled to advancement under the Amended and Restated Certificate of
Incorporation of American Apparel, Inc., dated December 12, 2007 (the “Charter”), and
the Indemnification Agreement, and to indemnification for this advancement proceeding
16
Pl.’s Ex. N.
17
Pl.’s Ex. O.
9
under the Indemnification Agreement and applicable law. 18 The Company contends that
Charney is not entitled to advancement under either of these documents. On July 8,
2015, I heard oral argument on the parties’ motions.
II. LEGAL ANALYSIS
A. Legal Standard
Under Court of Chancery Rule 56(c), summary judgment shall be granted where
“there is no genuine issue as to any material fact and . . . the moving party is entitled to a
judgment as a matter of law.” 19 The evidence must be viewed in the light most favorable
to the non-moving party, and summary judgment is warranted only where no rational trier
of fact would fail to find that the moving party is entitled to judgment. 20 “[T]he use of
summary judgment is particularly appropriate in advancement disputes” 21 because the
controversy is typically limited to a legal question: whether the underlying proceeding
“trigger[s] a right to advancement under the terms of a corporate instrument.” 22
18
Although Charney’s complaint also sought advancement under the Employment
Agreement and the Company’s bylaws, he not did move for summary judgment based on
those provisions. Pl.’s Op. Br. 14 n.6.
19
Ct. Ch. R. 56(c).
20
See Cerberus Int’l, Ltd. v. Apollo Mgmt., L.P., 794 A.2d 1141, 1150-51 (Del. 2002)
(“[T]he judge as gate-keeper merely considers whether the finder of fact could come to a
rational conclusion either way . . . .”).
21
Donohue v. Corning, 949 A.2d 574, 576 (Del. Ch. 2008).
22
DeLucca v. KKAT Mgmt., L.L.C., 2006 WL 224058, at *6 (Del. Ch. Jan. 23, 2006).
10
Although Court of Chancery Rule 56(h) permits the Court to deem cross motions
for summary judgment “to be the equivalent of a stipulation for decision on the merits
based on the record submitted with the motions,” the rule does not apply when one party
argues that a genuine issue of material fact exists. 23 Charney makes that argument here, 24
thus I will examine each motion on its own merit. 25 As explained below, I conclude that
the alleged factual disputes Charney has identified do not raise a genuine issue of
material fact so as to preclude entry of summary judgment in the Company’s favor.
Here, Charney asserts he is entitled to advancement under the Company’s Charter
and his Indemnification Agreement. Before addressing those issues, I address the legal
effect, if any, of the Standstill Agreement with respect to Charney’s advancement rights.
B. The Standstill Agreement Does Not Grant Charney a Right to
Advancement
Charney’s brief created some confusion as to whether he was contending that the
Standstill Agreement provided him an independent source of advancement separate and
apart from the Charter and Indemnification Agreement. In a terse argument, he asserted
at one point that the “plain language” of Section 2(g) of the Standstill Agreement
23
See O’Neill v. Town of Middletown, 2007 WL 2752981, at *6 n.34 (Del. Ch. Mar. 29,
2007) (concluding that Court of Chancery Rule 56(h) does not apply when at least one
party argues, even unpersuasively, that there is a genuine issue of material fact).
24
Pl.’s Ans. Br. 20 n.8. This position appears to be at odds with Charney’s earlier
assertion that the parties had “stipulated to resolve this matter on cross-motions for
summary judgment.” Pl.’s Op. Br. 15 n.7.
25
See Bernstein v. TractManager, Inc., 953 A.2d 1003, 1007 (Del. Ch. 2007) (noting that
the Court reviews each motion separately on cross-motions for summary judgment).
11
“requires American Apparel to advance the fees and costs [he] incurs in defending” the
Standstill Proceeding and, at another point, that the “plain language” of that provision
merely “confirms that [Charney’s] existing advancement rights apply to” the subject
matter of the proceeding. 26
Section 2(g) of the Standstill Agreement states, as follows:
The Company shall abide by its obligations under its Amended and
Restated Certificate of Incorporation, the Company Bylaws and other
indemnification agreements in effect on the date hereof . . . to indemnify its
existing Independent Directors and officers and all New Board Designees
for any damages arising out of actions to remove Charney as CEO and all
related matters, including negotiation and execution of this Agreement and
the transactions and covenants contemplated thereby. 27
At oral argument, Charney’s counsel confirmed that Charney does not contend that
Section 2(g) provides an independent source of a right to advancement. 28 That was a
sensible concession. Section 2(g) speaks of indemnification “for any damages” and does
not discuss advancement. The plain thrust of the provision, moreover, was to clarify that
the Company would “abide” by its indemnification obligations arising of out a
determination to remove Charney as CEO, a matter that would create an obvious
litigation exposure for the Company’s directors and officers. In other words, rather than
providing a separate grant of rights, Section 2(g) merely confirmed preexisting rights to
26
Pl.’s Op. Br. 17-18.
27
Def.’s Ex. 1 (Standstill Agreement) at § 2(g). The Standstill Agreement is governed by
Delaware law. Id. at § 11.
28
Tr. of Oral Arg. at 11-12.
12
indemnification. Thus, the provision has no bearing on the scope of Charney’s alleged
advancement rights or the resolution of the pending cross-motions.
C. Charney is Not Entitled to Advancement under the Charter
Although Charney did not identify the Company’s Charter as a source of
advancement rights in his complaint, it became the lead argument in his brief. Article
Eighth, Paragraph B of the Company’s Charter provides that the Company must
indemnify any person “to the full extent permitted” by 8 Del. C. § 145 and that the
Company must advance expenses to any “officer or director” who may be entitled to such
indemnification:
The Corporation, to the full extent permitted by Section 145 of the
[Delaware General Corporation Law (“DGCL”)], as amended from time to
time, shall indemnify all persons whom it may indemnify pursuant thereto.
Expenses (including attorneys’ fees) incurred by an officer or director in
defending any civil, criminal, administrative, or investigative action, suit or
proceeding for which such officer or director may be entitled to
indemnification hereunder shall be paid by the Corporation in advance of
the final disposition of such action, suit or proceeding upon receipt of an
undertaking by or on behalf of such director or officer to repay such
amount if it shall ultimately be determined that he is not entitled to be
indemnified by the Corporation as authorized hereby. 29
“[T]he rules that govern the interpretation of statutes, contracts, and other written
instruments apply to the interpretation of corporate charters and bylaws.” 30 Delaware
29
Pl.’s Ex. K (Charter) at Art. EIGHTH ¶ B.
30
Sassano v. CIBC World Mkts. Corp., 948 A.2d 453, 462 (Del. Ch. 2008).
13
courts interpret a contractual term that is reasonably or fairly susceptible to only one
interpretation according to the term’s plain meaning. 31
Charney contends that, under Article Eighth, Paragraph B of the Company’s
Charter, the Company’s “advancement obligations are defined by and flow from its
indemnification obligations” such that he is entitled to advancement for his expenses in
the Standstill Proceeding if the Company could indemnify him for the Standstill
Proceeding under 8 Del. C. § 145. 32 I disagree with this contention because, as explained
below, the Company’s indemnification and advancement obligations under the Charter
are not coterminous with respect to former, as opposed to current, directors and officers.
Under Delaware law, although “the rights to indemnification and advancement are
correlative, they are still discrete and independent rights.” 33 “Because rights to
indemnification and advancement differ in important ways, [Delaware] courts have
refused to recognize claims for advancement not granted in specific language clearly
suggesting such rights.” 34 As Chancellor Allen concluded over twenty years ago in
Advanced Mining Systems, Inc. v. Fricke, 35 an obligation in a corporation’s charter or
bylaw to indemnify an individual does not, on its own, include an obligation to advance
31
See Osborn v. Kemp, 991 A.2d 1153, 1159-60 (Del. 2010).
32
Pl.’s Op. Br. 19-23.
33
Kaung v. Cole Nat’l Corp., 884 A.2d 500, 509-10 (Del. 2005).
34
Majkowski v. Am. Imaging Mgmt. Servs., LLC, 913 A.2d 572, 589 (Del. Ch. 2006).
35
623 A.2d 82 (Del. Ch. 1992).
14
expenses that may be indemnifiable. 36 Therefore, the Charter will only be read to require
advancement for Charney if it mandates advancement explicitly. It does not.
The first sentence of Article Eighth, Paragraph B, which governs indemnification,
makes mandatory what Sections 145(a) and 145(b) of the Delaware General Corporation
Law permit, i.e., for a corporation to indemnify any person sued “by reason of the fact
that the person is or was a director, officer, employee or agent of the corporation.” 37 In
other words, insofar as indemnification is concerned, this first sentence specifically
incorporates statutory provisions expressly applicable to both current and former
directors and officers. By contrast, the second sentence of Article Eighth, Paragraph B,
which governs advancement, refers simply to “officers” and “directors” without any
further qualification. When the words “officers” and “directors” are not qualified by the
adjective “former” (or a similar adjective), Delaware courts have interpreted those words
to refer to current officers and current directors.
In Schoon v. Troy Corp., 38 for example, the Court concluded that a bylaw
amendment, which changed the corporation’s advancement obligations from “expenses
incurred by any present or former director” to “losses reasonably incurred by a director or
officer,” had the effect of removing former directors from the class of persons entitled to
36
Id. at 84.
37
8 Del. C. §§ 145(a)-(b) (emphasis added).
38
948 A.2d 1157 (Del. Ch. 2008).
15
advancement. 39 The key provision of Section 145 governing advancement distinguishes
between current and former directors and officers in a manner similar to Schoon.
Specifically, the first sentence of Section 145(e) refers to a current director or
officer simply as a “director” or “officer” without any qualifier. It provides, in relevant
part, that a corporation may advance “[e]xpenses (including attorneys’ fees) incurred by
an officer or director in defending any . . . action, suit or proceeding . . . in advance of the
final disposition of such action, suit or proceeding upon receipt of an undertaking by or
on behalf of such director or officer to repay such amount if it shall ultimately be
determined that such person is not entitled to be indemnified by the corporation . . . .”
The second sentence of Section 145(e) treats former directors and officers differently. It
provides that “[s]uch expenses (including attorneys’ fees) incurred by former directors
and officers . . . may be so paid upon such terms and conditions, if any, as the corporation
deems appropriate.” 40
Based on these authorities and the absence of any reference to “former” directors
or officers (or any similar qualifier) in enumerating the Company’s advancement
obligations in Article Eighth, Paragraph B, I conclude that the plain language of the
Charter affords mandatory advancement rights only to current directors or officers of the
39
See id. at 1165-67; see also King v. DAG SPE Managing Member, Inc., 2013 WL
6870348, at *5-6 (Del. Ch. Dec. 23, 2013) (concluding that a former director does not
have inspection rights under 8 Del. C. § 220, which provides that “[a]ny director shall
have the right to examine the corporation’s stock ledger, a list of its stockholders and its
other books and records for a purpose reasonably related to the director’s position as a
director”).
40
8 Del. C. § 145(e) (emphasis added).
16
Company as of the time suit is filed against them. 41 Thus, because Charney was neither
an officer nor a director of American Apparel when the Standstill Proceeding was filed
on May 15, 2015—he was a former officer and a former director at that time—he is not
entitled to advancement for that proceeding under the Company’s Charter. 42
D. Charney Is Not Entitled to Advancement Under
The Indemnification Agreement
Under 8 Del. C. § 145(f), the advancement rights of a former director or officer set
forth in the corporation’s charter or bylaws are not “exclusive of any other rights to
which those seeking . . . advancement of expenses may be entitled under any . . .
agreement, . . . both as to action in such person’s official capacity and as to action in
another capacity while holding such office.” Here, separate from and in addition to the
Charter provision discussed above, the Company agreed to indemnify and to advance
certain of Charney’s expenses under his Indemnification Agreement, which is governed
by Delaware law. 43 The two relevant provisions of the Indemnification Agreement the
41
See Schoon at 1165-66 (noting that advancement rights vest upon the filing of a
lawsuit) (citing Salaman v. Nat’l Media Corp., 1992 WL 808095, at *6 (Del. Super. Oct.
8, 1992)).
42
Even if the Charter did afford advancement rights to former directors or officers,
Charney would not be entitled to advancement under Article Eighth, Paragraph B
because Charney was not made a party to the Standstill Proceeding “by reason of the
fact” that he formerly was a director or officer of the Company. See Section II.D. The
“by reason of the fact” requirement is the standard from Section 145 that is incorporated
into Article Eighth, Paragraph B.
43
Def.’s Ex. 2 (Indemnification Agreement) at § 24.
17
parties have identified are Sections 2(b) and 17. The first question to be analyzed is how
these provisions operate with each other in the context of the Indemnification Agreement.
1. The Relationship Between Sections 2 and 17 of the
Indemnification Agreement
Section 2 of the Indemnification Agreement enumerates in four subparts certain
rights of indemnification and advancement the Company agreed to provide to Charney.
Section 2(b) is the core advancement provision. To construe this provision, it is
necessary to understand the indemnification rights afforded under Section 2 and, in
particular, the defined terms that the indemnification provision has in common with the
advancement provision.
Section 2(a) is the core indemnification provision. It states, in relevant part, as
follows:
In the event [Charney] was, is or becomes a party to or witness or other
participant in, or is threatened to be made a party to or witness or other
participant in, a Claim by reason of (or arising in part out of) an
Indemnifiable Event, the Company shall indemnify [Charney] to the fullest
extent permitted by law . . . against any and all Indemnifiable Amounts.
For purposes of this opinion, the term “Claim” can be simplified to mean a proceeding. 44
The term “Indemnifiable Event,” which also is incorporated into the advancement
provision in Section 2(b), is defined as follows:
44
The full definition of “Claim” is “any threatened, asserted, pending or completed
action, suit or proceeding, or any appeal thereof, or any inquiry or investigation, whether
instituted by the Company or any governmental agency or other party, that Indemnitee in
good faith believes might lead to the institution of any such action, suit or proceeding,
whether civil, criminal, administrative, investigative or other, including any arbitration or
other alternative dispute resolution mechanism.” Def.’s Ex. 2 (Indemnification
Agreement) at § 1(c).
18
any event or occurrence, whether occurring before, on or after the date of
this Agreement, related to the fact that [Charney] is or was a director
and/or officer or fiduciary of the Company, or is or was serving at the
request of the Company as a director, officer, employee, trustee, agent or
fiduciary of another Person, or by reason of anything done or not done by
[Charney] in any such capacity. 45
As discussed below, the key interpretative question is the meaning of the phrase “related
to the fact” as used in this defined term.
Section 2(b) of the Indemnification Agreement governs advancement. It states, in
relevant part: “If so requested by [Charney], the Company shall advance . . . any and all
Expenses incurred by [Charney].” 46 The term “Expenses” is defined to include “all fees,
costs and expenses incurred in connection with any Claim relating to any Indemnifiable
Event . . . .” 47 As noted above, the term “Claim” can be simplified to mean a proceeding.
Because the Standstill Proceeding does not implicate any claims arising from Charney’s
service as a director or officer of another entity at the request of the Company, the
definition of the term “Indemnifiable Event” quoted above can be simplified for purposes
of this opinion to mean “any event or occurrence related to the fact that Charney is or was
a director and/or officer of the Company, or by reason of anything done or not done by
Charney in any such capacity.” Incorporating the simplified definitions of “Expenses,”
“Claim,” and “Indemnifiable Event,” Section 2(b) of the Indemnification Agreement
reads as follows:
45
Def.’s Ex. 2 (Indemnification Agreement) at § 1(f) (emphasis added).
46
Def.’s Ex. 2 (Indemnification Agreement) at § 2(b).
47
Id. at § 1(d).
19
The Company shall advance any and all [Expenses] expenses incurred in
connection with any [Claim] proceeding relating to any [Indemnifiable
Event] event or occurrence related to the fact that Charney is or was a
director and/or officer of the Company, or by reason of anything done or
not done by Charney in any such capacity.
Section 17 appears toward the end of the Indemnification Agreement, among a
series of standard provisions governing severability, the use of counterparts, choice of
law, and the like. It states in its entirety, as follows:
This Agreement shall be binding upon and inure to the benefit of and be
enforceable by the parties hereto and their respective successors (including
any direct or indirect successor by purchase, merger, consolidation or
otherwise to all or substantially all of the business and/or assets of the
Company), assigns, spouses, heirs, executors and personal and legal
representatives. The Company shall require and cause any successor
(whether direct or indirect by purchase, merger, consolidation, or
otherwise) to all or substantially all of the business and/or assets of the
Company, by written agreement in form and substance reasonably
satisfactory to [Charney] and his or her counsel, expressly to assume and
agree to perform this Agreement in the same manner and to the same extent
that the Company would be required to perform if no such succession had
taken place. This Agreement, and all agreements and obligations of the
Company contained herein, shall continue in effect during the period
[Charney] is an officer or director of the Company (or is or was serving at
the request of the Company as a director, officer, employee, trustee, agent
or fiduciary of another Person) and shall continue thereafter so long as
[Charney] shall be subject to any Claim by reason of his or her Corporate
Status (as defined below), whether or not he or she [sic] is then acting or
serving in any such capacity at the time any liability or expense is incurred
for which indemnification is required to be provided by the Company under
this Agreement. “Corporate Status” means that status of a person who is or
was a director and/or officer of [sic] fiduciary of the Company, or is or was
serving at the request of the Company as a director, officer, employee,
trustee, agent or fiduciary of another Person. 48
48
Def.’s Ex. 2 (Indemnification Agreement) at § 17 (emphasis added).
20
The Company interprets the third sentence of Section 17 to mean that once
Charney was no longer a director or officer of American Apparel, he “is entitled to
advancement only if he demonstrates that the claims in the Standstill Litigation are
brought ‘by reason of’ his status as a director, officer or fiduciary of the Company.” 49 In
other words, the Company argues that, insofar as former fiduciaries are concerned, the
“by reason of” clause in Section 17 trumps the language used in Section 2(b) to define the
scope of the Company’s advancement obligations. Thus, according to the Company,
because Charney was named a party to the Standstill Proceeding in May 2015, after he
ceased to be a fiduciary of the Company, it is unnecessary to consider whether the
matters over which Charney was sued fall within the definition of “Indemnifiable Event”
under Section 2(b) if those matters did not arise “by reason of” Charney’s status as a
former director or officer of the Company. Because Section 17 governs “all agreements
and obligations of the Company” contained in the Indemnification Agreement, the same
logic would apply regarding a claim for indemnification under Section 2(a).
Delaware law “adheres to the objective theory of contracts,” 50 which requires a
court to interpret a particular contractual term to mean “what a reasonable person in the
position of the parties would have thought it meant.” 51 Delaware courts also construe
49
Def.’s Op. Br. 17.
50
Salamone v. Gorman, 106 A.3d 354, 367 (Del. 2014).
51
Rhone-Poulenc Basic Chems. Co. v. Am. Motorists Ins. Co., 616 A.2d 1192, 1196 (Del.
1992).
21
agreements as a whole and give meaning to all provisions. 52 “The meaning inferred from
a particular provision cannot control the meaning of the entire agreement if such an
inference conflicts with the agreement’s overall scheme or plan.” 53
In my view, the only reasonable interpretation of Section 17 when read together
with the other provisions of the Indemnification Agreement is as a durational provision to
define the period of time the obligations in the Indemnification Agreement remain in
effect and not, as the Company advocates, as a provision that specifies the circumstances
in which Charney would be eligible to receive advancement (or indemnification) once he
is no longer a director or officer of the Company. Reading Section 17 in this manner, the
provisions of the Indemnification Agreement would remain in effect (a) during the period
Charney was a director or officer of the Company (or serving at the request of the
Company as a director, officer, employee, trustee, agent or fiduciary of another entity),
and (b) thereafter for as long he is exposed to being sued “by reason of” his former status
as a fiduciary of the Company, i.e., until such time as such claims would be time-barred.
This construction follows from the ostensible purpose of the operative sentence of
Section 17, which is to define the period of time when all of the “obligations of the
Company” contained in the Indemnification Agreement “shall continue in effect.” It also
follows from the context in which this sentence appears within Section 17. The first
52
See Kuhn Constr., Inc. v. Diamond State Port Corp., 990 A.2d 393, 396-97 (Del. 2010)
(“[Delaware courts] will read a contract as a whole and . . . will give each provision and
term effect, so as not to render any part of the contract mere surplusage.”).
53
GMG Capital Invs., LLC v. Athenian Venture Partners I, L.P., 36 A.3d 776, 779 (Del.
2012).
22
sentence of Section 17 defines who is bound by the Indemnification Agreement. The
second sentence ensures that the Company will cause any successor to expressly assume
the obligations in the Indemnification Agreement. It is logical that, after defining the
universe of parties to be bound under the Indemnification Agreement, the parties would
then address the duration of the obligations owed.
Significantly, construing the last sentence of Section 17 as a durational provision
harmonizes that provision with Section 2 of the Indemnification Agreement. As
discussed above, Section 2 grants Charney a mandatory right to indemnification as well
as advancement for claims falling within the definition of “Indemnifiable Event.” In
other words, Section 2 creates and carefully defines the scope of the indemnification and
advancement obligations the Company owes to Charney. It would be illogical to
construe Section 17 to cover the same ground as Section 2. Instead, following the
principle that “a particular provision cannot control” if it “conflicts with the agreement’s
overall scheme,” 54 it is more reasonable to infer that the drafters of the Indemnification
Agreement intended Sections 2 and 17 of the Indemnification Agreement to serve
different functions. This is achieved by construing the third sentence of Section 17 as a
durational provision and not as one that defines the scope of the Company’s
indemnification or advancement obligations to Charney. Interpreted as such, Section 17
would answer the question whether the Company’s obligations under the Indemnification
Agreement remain in effect at a given point in time and, if so, one would then look to
54
Id.
23
Section 2 to determine if the nature of the claims asserted satisfy the definition of an
“Indemnifiable Event” that is incorporated in the advancement provision in Section 2(b).
Applying this construction of Section 17, it is beyond dispute that the
Indemnification Agreement continued to be in effect when the Standstill Proceeding was
filed. Charney was no longer a director or officer or fiduciary of the Company at that
time, but he was exposed to being sued “by reason of” his status as a former officer and
director of the Company at that time. “Although claims for breach of fiduciary duty
brought in this court are governed by the equitable doctrine of laches, rather than by strict
application of the statute of limitations that applies at law, equity follows the law when
that is sensible, and the statute of limitations will apply by analogy.” 55 Under Delaware
law, the analogous statute of limitations for a breach of fiduciary duty claim is three
years. 56 The Standstill Proceeding was initiated well within three years of Charney’s
ceasing to be a director or officer of the Company and, thus, he was exposed to being
sued “by reason of” his status as a former director or officer at such time. The Company
makes no argument to contrary.
The next question to be considered is whether the alleged misconduct that forms
the basis of the claims in the Standstill Proceeding falls within the scope of the
advancement provision in Section 2(b) and, in particular, whether such allegations satisfy
the “Indemnifiable Event” standard incorporated in that provision.
55
In re Sirius XM S’holder Litig., 2013 WL 5411268, at *4 (Del. Ch. Sept. 27, 2013).
56
10 Del. C. § 8106.
24
2. The Scope of the Company’s Obligations under Section 2(b)
As discussed above, using simplified definitions of the terms “Expenses,”
“Claim,” and “Indemnifiable Event,” Section 2(b) of the Indemnification Agreement
would read as follows:
The Company shall advance any and all expenses incurred in connection
with any proceeding relating to any event or occurrence related to the fact
that Charney is or was a director and/or officer of the Company, or by
reason of anything done or not done by Charney in any such capacity.
The phrase “event or occurrence” refers to the misconduct alleged in the underlying
proceeding that forms the basis of Charney’s alleged breaches of the Standstill
Agreement. Thus, the inquiry in this case is whether those actions are related to the fact
that Charney is or was a director and/or officer of the Company, or occurred by reason of
anything done or not done by Charney in any such capacity. Given this focus, the
circumstances of when Charney executed the Standstill Agreement and the general
subject matter of the Standstill Agreement are largely irrelevant—what matters is the
substance of the Company’s allegations against Charney in the Standstill Proceeding.
Charney contends that the “related to the fact” phrase is broader in scope than the
“by reason of the fact” phrase that appears in 8 Del. C. § 145 and that has been the
subject of most advancement disputes in this Court. Without specifically defining
“related to the fact,” Charney contends he is entitled to advancement for the Standstill
Proceeding because some of his alleged violations of the Standstill Agreement occurred
before his termination as CEO in December 2014, and because the substance of his
alleged violations (in general, his efforts to regain control of the Company and his
25
disparagement of the Company) are all related to the fact that he was a director and/or
officer. According to Charney, “[b]ut for [his] former corporate service and his desire to
regain the positions wrongfully taken from him, he never would have entered into the
Standstill Agreement and could not have been accused of breaching it.” 57
The Company contends that Charney’s “but for” interpretation of “related to the
fact” would lead to absurd results because it “is so broad that it would encompass any
acts, committed at any time, that Mr. Charney claims had any relation to the Company.” 58
The Company argues that the phrase “related to the fact” should not be interpreted as
broader than the phrase “by reason of the fact” used in 8 Del. C. § 145. According to the
Company, Charney’s violations of the Standstill Agreement were not “by reason of the
fact” that he was a director or officer of American Apparel because he engaged in that
conduct in his personal capacity without using any corporate power. 59
Before interpreting “related to the fact” here, it is useful to review the meaning of
“by reason of the fact” under Delaware law. In Homestore, Inc. v. Tafeen, 60 the
Delaware Supreme Court explained that a proceeding for which advancement is sought is
“by reason of the fact” that one was a director or officer “if there is a nexus or causal
57
Pl.’s Op. Br. 32.
58
Def.’s Ans. Br. 23-24.
59
Def.’s Ans. Br. 16-22, 28-29.
60
888 A.2d 204 (Del. 2005).
26
connection between” the underlying proceeding and “one’s official corporate capacity.” 61
A causal connection exists “if the corporate powers were used or necessary for the
commission of the alleged misconduct.” 62 Against this background, I must interpret the
phrase “related to the fact” as it appears in the Indemnification Agreement.
“When interpreting a contract, the role of a court is to effectuate the parties’ intent.
In doing so, [a court is] constrained by a combination of the parties’ words and the plain
meaning of those words where no special meaning is intended.” 63 “The language of the
[a]greement must therefore be the starting point.” 64 “Contract terms themselves will be
controlling when they establish the parties’ common meaning so that a reasonable person
in the position of either party would have no expectations inconsistent with the contract
language.” 65
The Indemnification Agreement does not define “related to the fact.” The parties
have not cited any authority interpreting “related to the fact” in a corporate instrument or
agreement providing for advancement, 66 nor have they provided any precise linguistic
61
Id. at 214.
62
Bernstein v. TractManager, Inc., 953 A.2d 1003, 1011 (Del. Ch. 2007).
63
Lorillard Tobacco Co. v. Am. Legacy Found., 903 A.2d 728, 739 (Del. 2006).
64
Citadel Holding Corp. v. Roven, 603 A.2d 818, 822 (Del. 1992).
65
Eagle Indus., Inc. v. DeVilbiss Health Care, Inc., 702 A.2d 1228, 1232 (Del. 1997).
66
In support of his expansive interpretation of “related to the fact,” Charney relies on two
decisions of this Court: Lillis v. AT&T Corp., 904 A.2d 325 (Del. Ch. 2006), and
DeLucca v. KKAT Mgmt., L.L.C., 2006 WL 224058 (Del. Ch. Jan. 23, 2006). Lillis
construed the term “in connection with” as used in an expense reimbursement provision
27
definition of the term. The Court’s own research shows that the phrase appears to be
fairly prevalent in indemnification agreements, 67 and that at least one decision of this
Court, Underbrink v. Warrior Energy Services Corp., 68 analyzed an indemnification
provision using the phrase.
In Underbrink, the bylaws of the company at issue (Warrior) indemnified a
director against claims arising out of events “related to the fact that the Indemnitee is or
was a director . . . .” 69 The Court did not specifically address the meaning of “related to
the fact,” but it appeared to use the phrase interchangeably with the phrase “by reason of
the fact” in its analysis:
in certain change of control agreements. 904 A.2d at 329. DeLucca construed the phrase
“in connection with or arising out of or related to” as used in a limited liability company
agreement. 2006 WL 224058, at *9-10. Both decisions understandably acknowledged
that these phrases generally are construed broadly. Neither decision, however, involved a
corporate instrument or agreement subject to the limitations of 8 Del. C. § 145. “[U]nlike
Section 145(e), the LLC Act does not preclude a company from providing advancement
rights beyond fees and expenses incurred ‘in defending’ a covered proceeding. . . . [T]he
LLC Act gives contracting parties complete discretion in establishing the scope of
indemnification and advancement rights . . . .” Fillip v. Centerstone Linen Servs., LLC,
2014 WL 1821299, at *6 (Del. Ch. May 1, 2014) (citations omitted). Lillis similarly did
not address director and officer advancement under Section 145.
67
See, e.g., 2 Corp. Forms § 18:19 (September 2015) (using “related to the fact” in the
definition of “Indemnifiable Event” in an example form indemnification agreement);
Richard D. Harroch & Gregory C. Smith, Start-up & Emerging Companies 1-91 (2003)
(same); Indemnifiable Event Sample Clauses, Law Insider,
https://www.lawinsider.com/clause/certain-definitions/indemnifiable-event (providing
numerous excerpts from indemnification agreements that use “related to the fact”).
68
2008 WL 2262316 (Del. Ch. May 30, 2008).
69
Id. at *7. The bylaws defined an “Indemnitee” to include a director who may be made
party to a proceeding “by reason of his Corporate Status.” Id.
28
A claim not “arising out of any event or occurrence related to the fact [the
claimant] is or was a director” would not qualify for indemnification under
Article V, § 1. In seeking advancement for expenses related to the defense
of claims not brought by reason of the fact they were directors of Warrior,
Plaintiffs are asking for advancement of expenses for which
indemnification is not possible. I find such a request unreasonable under
the terms of the 2006 Bylaws. 70
The Court went on to explain that the “guiding principle” to implement its ruling would
involve application of the “nexus or causal connection” standard the Supreme Court
articulated in Tafeen to interpret the “by reason of the fact” requirement of Section 145. 71
Dictionary references similarly support treating “related to the fact” and “by
reason of the fact” as interchangeable phrases for purposes of the Indemnification
Agreement. “Delaware courts look to dictionaries for assistance in determining the plain
meaning of terms which are not defined in a contract.” 72 The New Oxford American
Dictionary defines “be related” when that verb is used with an object (e.g., “high
unemployment is related to high crime rates”) as “be causally connected.” 73 Applying
70
Id. at *16 (emphases added). See also O’Brien v. IAC/Interactive Corp., 2010 WL
3385798, at *13 (Del. Ch. Aug. 27, 2010) aff’d sub nom. IAC/InterActiveCorp v.
O’Brien, 26 A.3d 174 (Del. 2011) (discussing “related to the fact” and “by reason of the
fact” side-by-side when comparing an indemnification agreement governed by Florida
law and 8 Del. C. § 145(a), without making note of any difference between the two).
71
Id.
72
Lorillard, 903 A.2d at 738; see also Perconti v. Thornton Oil Corp., 2002 WL 982419,
at *4 (Del. Ch. May 3, 2002) (interpreting “by reason of the fact” in 8 Del. C. § 145 by
reference to the definition of “by reason of” in Black’s Law Dictionary).
73
New Oxford American Dictionary 1473 (3rd ed. 2010). The New Oxford American
Dictionary also defines “relate to” when that verb is used without an object (e.g., “the
new legislation related to corporate activities”) as “have reference to; concern.” Id.
29
that definition, “related to the fact” would mean “be causally connected to the fact” and
thus would be equivalent to the phrase “by reason of the fact” in Section 145 as construed
by the Supreme Court in Tafeen. In my view, this is the only reasonable interpretation of
“related to the fact” as used in the Indemnification Agreement for two reasons.
First, to construe “related to the fact” more broadly as Charney advocates to
require only a “but for” connection to his status as former fiduciary of American Apparel
would lead to absurd results to which no reasonable person would have agreed.
Consider, for example, that a stockholder sues Charney for breaching his fiduciary duty
as an American Apparel director, and Charney is deposed in that proceeding. During his
deposition, Charney commits a tort against the stenographer, who then files suit against
Charney. Adopting Charney’s interpretation, he would be entitled to advancement for the
tort lawsuit because, “but for” his position as an American Apparel director, he would not
have been at the deposition and thus would not have engaged in the tortious conduct.
Such an example may seem extreme, but from a legal perspective, it is not so different
from the present situation. According to Charney, his alleged breach of the
Indemnification Agreement triggers advancement because he never would have entered
into the contract “but for” his roles at American Apparel. In my opinion, no reasonable
corporation would have subjected itself to such attenuated advancement obligations. 74
74
See Osborn v. Kemp, 991 A.2d 1153, 1160 (Del. 2010) (“An unreasonable
interpretation produces an absurd result or one that no reasonable person would have
accepted when entering the contract.”).
30
Second, to construe “related to the fact” more broadly than “by reason of the fact”
as used in Section 145, would render the indemnification provision in the Indemnification
Agreement invalid under Delaware law in my view. As explained above, the definition
of “Indemnifiable Event” in which the phrase “related to the fact” appears is incorporated
into both the indemnification and advancement provisions of the Indemnification
Agreement. 75 Although 8 Del. C. § 145(f) allows corporations to provide
indemnification rights via contract, substantial authority supports the proposition that
such contractual provisions must comply with the requirements contained in the rest of 8
Del. C. § 145, 76 which would include the requirement in subsections 145(a) and (b) that a
person must be made a party to a proceeding “by reason of the fact” that he or she is or
was a director, officer, employee or agent of the corporation to receive indemnification.
Thus, any definition of “related to the fact” that is more expansive than “by reason of the
fact” would, as applied in the indemnification section of the Indemnification Agreement,
75
Def.’s Ex. 2 (Indemnification Agreement) at §§ 2(a)-2(b) (providing for
indemnification of Indemnifiable Amounts and advancement of Expenses, both of which
are defined in relation to Indemnifiable Event).
76
See Blankenship v. Alpha Appalachia Holdings, Inc., 2015 WL 3408255, at *20 (Del.
Ch. May 28, 2015) (unconditional indemnification obligations without regard for
reasonableness of expenses or a causal nexus “would exceed the scope of indemnification
that a Delaware corporation may lawfully undertake”); Sun–Times Media Grp., Inc. v.
Black, 954 A.2d 380, 404 n.93 (Del. Ch. 2008) (noting that 8 Del. C. § 145(f) does not
authorize indemnification contracts that are contrary to the requirements of 8 Del. C.
§ 145); Cochran v. Stifel Fin. Corp., 2000 WL 286722, at *18 (Del. Ch. Mar. 8, 2000)
aff’d in part, rev’d in part, 809 A.2d 555 (Del. 2002) (noting that contractual
indemnification rights allowed under 8 Del. C. § 145(f) should be disturbed only if “those
broader rights are contrary to the limitations or prohibitions set forth in the other section
145 subsections . . .”) (internal quotation marks omitted).
31
invalidly exceed the corporation’s indemnification powers as circumscribed under
Section 145. 77 Although this dispute concerns advancement rather than indemnification,
the definitions in the Indemnification Agreement must be applied consistently throughout
the agreement. It is not reasonable to believe that the drafters of the Indemnification
Agreement intended to impart a meaning to the phrase “related to the fact” that would
render the indemnification provision ultra vires. 78
In reaching the conclusion that the phrase “related to the fact” is equivalent to the
meaning of “by reason of the fact” under Section 145, I recognize the interpretative
tension that is created because the phrases “related to the fact” and “by reason of” are
both present in the definition of “Indemnifiable Event.” 79 “Delaware courts do prefer to
interpret contracts to give effect to each term rather than to construe them in a way that
77
The Company argues more broadly, without regard to the specific terms of the
Indemnification Agreement, that a “corporation may not provide advancement where
indemnification would be unlawful.” Def.’s Ans. Br. 25. I do not reach this question,
which ostensibly conflicts with the Supreme Court’s pronouncement in Tafeen that
“Section 145(e) . . . expressly contemplates that corporations may confer a right to
advancement that is greater than the right to indemnification and recognizes that
advances must be repaid if it is ultimately determined that the corporate official is not
entitled to be indemnified.” 888 A.2d at 212.
78
Indeed, Section 2(a) calls for indemnification “to the fullest extent permitted by law.”
Def.’s Ex. 2 (Indemnification Agreement) at § 2(a). It is therefore not reasonable to
interpret the term “Indemnifiable Event” as exceeding the boundaries of the law.
79
To repeat, the term “Indemnifiable Event” is defined as “any event or occurrence,
whether occurring before, on or after the date of this Agreement, related to the fact that
[Charney] is or was a director and/or officer or fiduciary of the Company, or is or was
serving at the request of the Company as a director, officer, employee, trustee, agent or
fiduciary of another Person, or by reason of anything done or not done by [Charney] in
any such capacity.” Def.’s Ex. 2 (Indemnification Agreement) at § 1(f) (emphasis
added).
32
renders some terms repetitive or mere surplusage.” 80 Although this preference to avoid
redundancy suggests that “related to the fact” should have a meaning distinct from “by
reason of” (which to my mind is substantively the same as “by reason of the fact”), the
canon must be balanced against the reasonableness of the alternatives. As Chancellor
Allen aptly put it, “[w]hile redundancy is sought to be avoided in interpreting contracts,
this principle of construction does not go so far as to counsel the creation of contract
meaning for which there is little or no support in order to avoid redundancy.” 81 When the
only interpretations that avoid surplusage are implausible ones, “the problem of
redundancy seems inescapable.” 82
The canon against surplusage, moreover, is most properly used to fathom the
objective intent of the contracting parties, not “to trap a careless draftsperson into
including a contract right that he did not mean to include. And [the canon] does not
change the fact that courts will not bend contract language to read meaning into the
words that the parties obviously did not intend.” 83 To the extent redundancy exists in the
80
In re IAC/InterActive Corp., 948 A.2d 471, 497 (Del. Ch. 2008) (quoting W. Willow-
Bay Court, LLC v. Robino-Bay Court Plaza, LLC, 2007 WL 3317551, at *11 (Del. Ch.
Nov. 2, 2007) aff’d, 985 A.2d 391 (Del. 2009)).
81
U.S. W., Inc. v. Time Warner Inc., 1996 WL 307445, at *15 (Del. Ch. June 6, 1996)
(Allen, C.).
82
Warner Commc’ns Inc. v. Chris-Craft Indus., Inc., 583 A.2d 962, 971 (Del. Ch. 1989)
aff’d, 567 A.2d 419 (Del. 1989) (Allen, C.).
83
Majkowski v. Am. Imaging Mgmt. Servs., LLC, 913 A.2d 572, 588 (Del. Ch. 2006)
(Strine, V.C.) (rejecting argument for advancement rights based on surplusage argument).
See also Restatement (Second) of Contracts § 203 cmt. b (1981) (“The preference for an
interpretation which gives meaning to every part of an agreement does not mean that
33
terms at issue, such minor overlap is clearly preferable to adopting an interpretation that
is contrary to the parties’ likely intentions, would lead to absurd results, and risks
exceeding the bounds of 8 Del. C. § 145. Taking the clause as a whole, in my view the
only reasonable interpretation is that the drafters intended the definition of Indemnifiable
Event to cover suits against directors and officers based on a causal nexus between the
disputed acts and their corporate powers, but not suits based on a mere “but for”
connection.
This conclusion is sensible in light of the public policy behind 8 Del. C. § 145.
When interpreting a contractual provision governing a corporation’s advancement
obligations, it is critical to “simultaneously apply the patina of [S]ection 145’s policy.” 84
Section 145 serves the dual policies of: (a) allowing corporate officials to
resist unjustified lawsuits, secure in the knowledge that, if vindicated, the
corporation will bear the expense of litigation; and (b) encouraging capable
women and men to serve as corporate directors and officers, secure in the
knowledge that the corporation will absorb the costs of defending their
honesty and integrity. 85
Thus, public policy supports enforcing “advancement provisions [that are] written
broadly or in a mandatory fashion.” 86 Conversely, in my view, Delaware public policy
every part is assumed to have legal consequences.”); Rag Am. Coal Co. v. AEI Res., Inc.,
1999 WL 1261376, at *5 (Del. Ch. Dec. 7, 1999) (Strine, V.C.) (questioning whether the
mandate to give full meaning to all contract provisions conflicts with “the legal
community’s impulse toward overinclusiveness”).
84
Reinhard & Kreinberg v. Dow Chem. Co., 2008 WL 868108, at *2 (Del. Ch. Mar. 28,
2008).
85
VonFeldt v. Stifel Fin. Corp., 714 A.2d 79, 84 (Del. 1998)
86
DeLucca, 2006 WL 224058, at *22 n.33.
34
does not support interpreting advancement provisions in a manner that would negate the
requirement of a causal connection to the use or abuse of corporate power.
In sum, for the reasons explained above, I construe the phrase “related to the fact”
to be equivalent to the recognized meaning of “by reason of the fact” in the context of a
corporate advancement claim. I therefore draw from Delaware’s established “by reason
of the fact” jurisprudence in considering whether Charney’s alleged violations of the
Standstill Agreement are causally connected to his former position as a director and/or
officer of the Company.
3. The Claims in the Standstill Proceeding Are Not Causally
Connected to Charney’s Former Status as a Director or Officer
of the Company
The complaint in the Standstill Proceeding identifies five categories of alleged
violations of the Standstill Agreement. Specifically, it alleges that Charney violated the
Standstill Agreement by: (i) discussing a potential takeover of the Company with Irving
Place Capital in violation of Sections 3(e) and 3(f); (ii) influencing stockholders’ voting
decisions at employee meetings in violation of Section 3(a)(ii); (iii) disparaging the
Company in violation of Section 6(b); (iv) participating in a lawsuit seeking to replace
directors of the Company in violation of Sections 3(c) and 3(h); and (v) soliciting interest
for nominees for a competing slate of directors in violation of Sections 3(a), 3(b), and
3(c). 87 For the reasons explained below, none of these alleged actions, all of which
occurred after Charney had been suspended as an American Apparel officer and after he
87
Pl.’s Ex. A (Standstill Proceeding Complaint) ¶¶ 50-80.
35
had resigned as an American Apparel director, is causally connected to the use or misuse
of Charney’s corporate power as a director or officer of American Apparel. Thus,
Charney is not entitled to advancement under the Indemnification Agreement to defend
against these claims.
Delaware courts typically determine whether there is a “causal connection” by
“examining the pleadings in the underlying litigation . . . .” 88 There is no “causal
connection” between a corporate official’s acts and his or her corporate power when “the
parties are litigating a specific and personal contractual obligation that does not involve
the exercise of judgment, discretion, or decision-making authority on behalf of the
corporation.” 89 For example, in Weaver v. ZeniMax Media, Inc., 90 where a former officer
sought advancement for claims alleging he violated his employment agreement, the Court
concluded that the alleged contractual breaches—“[t]aking too much vacation time and
submitting fraudulent travel expenses”—were not causally connected to his former
position as an officer because he did not use or abuse his corporate authority or position
in violating the specific terms of that contract. 91
88
Holley v. Nipro Diagnostics, Inc., 2014 WL 7336411, at *8 (Del. Ch. Dec. 23, 2014)
(citing Tafeen, 888 A.2d at 214); Weaver v. ZeniMax Media, Inc., 2004 WL 243163, at
*4 (Del. Ch. Jan. 30, 2004) (“The Court must seek to discern the nature of the claims
which [the plaintiff] is called upon to defend by reading the Counterclaim as a whole and
providing a reasonable interpretation of the substance of the allegations of each count.”).
89
Paolino v. Mace Sec. Int’l Inc., 985 A.2d 392, 403 (Del. Ch. 2009).
90
2004 WL 243163 (Del. Ch. Jan. 30, 2004).
91
Id. at *5.
36
Charney’s alleged violations of the Standstill Agreement are equivalent in my
view to those of the employment agreement at issue in Weaver. Just as no corporate
power was used or abused in taking too much vacation time or submitting fraudulent
travel expenses in Weaver, so too was no corporate power used or abused here when
Charney, after his suspension as an officer and resignation as a director, privately
discussed a potential takeover with Irving Place Capital, tried to influence stockholders at
employee meetings, disparaged the Company, sought to replace directors, or solicited
director nominees. Charney undertook those actions solely in his personal capacity.
I first assess the causal relationship underlying the signing of the Indemnification
Agreement itself, before turning to the alleged breaches. Although it is likely true that,
“but for” being a director and/or officer of the Company, Charney would not have been
subject to the types of obligations set forth in Sections 3 and 6 of the Standstill
Agreement, that observation does not mean that any conceivable violation of the
Standstill Agreement is causally connected to Charney’s former positions as a director
and officer. This is not a case where Charney would not have entered into the Standstill
Agreement “unless he was a high-ranking corporate officer with the power to execute
such contracts.” 92 Indeed, Charney did not, and had no authority to, enter into the
Standstill Agreement on the Company’s behalf. To wit, Charney and the Company were
92
See Mooney v. Echo Therapeutics, Inc., 2015 WL 3413272, at *10 (Del. Ch. May 28,
2015) (concluding that a former officer and director was entitled to advancement in
asserting claims against the company for breach of his employment agreement where the
company raised an affirmative defense that the director and officer had violated board
policies, such as hiring two individuals without the requisite company approval).
37
represented by separate counsel, and Charney and the Company signed on separate
signature lines: Charney signed on his own behalf, and Luttrell, the Interim CEO, signed
on the Company’s behalf. 93 Charney’s status within the Company may have formed part
of the narrative leading to the execution of the Standstill Agreement, but it did not create
a causal nexus with the transaction itself, which was between the Company and Charney
personally.
I turn next to the alleged breaches of the Standstill Agreement. Charney’s chief
argument is that, under the logic of Pontone v. Milso Industries Corp., 94 he is entitled to
advancement because “[t]he misconduct in which American Apparel alleges [he] engaged
is ‘inextricably intertwined with and based on his former role as an officer’ and director
of the Company” in two respects. 95 First, Charney contends that “[b]ut for” his status as
a former director and/or officer, “his alleged misconduct—interference with the
Company’s operations, efforts to regain control of American Apparel, undue influence on
the 2015 annual meeting, and his disparaging statements—would not have been
possible.” 96 Second, Charney submits that “[u]sing the relationships he built as CEO and
the knowledge he gained as a director and officer of the Company enabled [him] to take
93
Def.’s Ex. 1 (Standstill Agreement) at § 14, Signature Page.
94
100 A.3d 1023 (Del. Ch. 2014).
95
Pl.’s Op. Br. 21 (quoting Pontone, 100 A.3d at 1051).
96
Pl.’s Op. Br. 21-22.
38
the actions alleged in the [Standstill Proceeding].” 97 I do not agree that the actions
Charney actually took, divorced from the spin he now seeks to put on them, supply the
necessary causal nexus.
In my opinion, the facts here are plainly distinguishable from those in Pontone. In
that advancement case, Pontone, a former officer and director of New Milso, sought
advancement for expenses incurred in a proceeding in which New Milso asserted contract
and tort claims against Pontone for allegedly exploiting the confidential information he
obtained as a director and officer when he later went to work for a competitor. New
Milso’s bylaws provided for mandatory advancement of expenses incurred in connection
with a proceeding “by reason of” Pontone’s being or having been a director or officer of
New Milso. 98 The Court perceived the “gravamen” of the allegations in the underlying
proceeding to be that Pontone “engaged in a wrongful scheme to divert employees and
customers,” and that “this scheme was facilitated by the confidential proprietary and
trade secret information [he] acquired from serving as [a] director[] and officer[] of New
Milso.” 99 Accordingly, the Pontone Court concluded that, under the “by reason of the
fact” standard in New Milso’s bylaws, Pontone was entitled to advancement because
“corporate powers”—confidential information he obtained as a corporate official—were
used in, and necessary to, his alleged misconduct.
97
Pl.’s Ans. Br. 28.
98
See Pontone, 100 A.3d at 1052.
99
Id. at 1051.
39
Here, Charney seeks to extend the concept of “corporate powers” discussed in
Pontone to include what is essentially the social status and reputation he obtained as the
“face” of the Company he founded and led for many years. Indeed, Charney uses the
word “influence” throughout his briefs in reference to the supposed “corporate power” he
used when allegedly violating the Standstill Agreement. In my opinion, this type of
“influence” is not a “corporate power” because there is no allegation in the Standstill
Proceeding that Charney inappropriately misused Company information to violate the
Standstill Agreement. Put differently, basing a right to advancement on vague notions of
one’s persona as the founder and past leader of a corporation would render meaningless
the requirement of a causal connection to the use or misuse of corporate power necessary
to trigger the advancement provision in the Indemnification Agreement. 100
Charney’s former status may have made his violations of the Standstill Agreement
more damaging, but that former status was not necessary for the violations themselves.
Had he never been a director or officer of American Apparel, Charney still could have
sought out takeover partners, even if his pitch may have been less persuasive; he still
could have encouraged employee stockholders to change their voting decisions, even if
they may have had less reason to follow his lead; he still could have made disparaging
remarks about the Company, even if they may have fallen on deaf ears; and he still could
have sued to replace directors and solicit nominees as a stockholder, even if he may have
100
See Bernstein, 953 A.2d at 1013 (concluding that an interpretation of an advancement
bylaw under which “a director fighting a speeding ticket he or she received on the way to
a board meeting is entitled to advancement” would “render[] meaningless the words ‘by
reason of the fact’ ”).
40
been ignored. His past status only affected the magnitude of the alleged injuries caused
by the breaches. Although Charney makes much of the fact that his “efforts to regain
control of the Company by definition relate to his previous control of the Company,”101
his former status is largely irrelevant to the claims asserted in the Standstill Proceeding.
His attempt to re-take control of an enterprise he once ran may add narrative intrigue, but
it is legally no different from any other attempt to take control. The Standstill Agreement
could just as well have been entered into by an activist stockholder with a large share
block attempting to take control of the Company. Whether or not that stockholder
previously ran the Company has no legal effect.
Finally, that certain of Charney’s alleged violations of the Standstill Agreement
(the Metchek and Irving Place Capital discussions) may have occurred after he had
signed the Standstill Agreement and resigned as a director but before he was terminated
as CEO in December 2014 is of no moment in my view. 102 Even before he was
terminated as CEO, he had already been terminated as a director and suspended as a
CEO, leaving him effectively without corporate powers. Although claims challenging
actions taken when one holds the title of a corporate official typically satisfy the “causal
connection” standard, that condition is not dispositive, as cases such as Weaver
demonstrate. The alleged breaches of the Standstill Agreement that these discussions
101
Pl.’s Ans. Br. 22.
102
Charney alleges that his discussions with Metchek occurred in “the third and fourth
quarters of 2014,” while he was employed by the Company, and that his discussions with
Irving Place Capital occurred “immediately prior to his termination” as an officer in
December 2014. Verified Complaint for Advancement ¶¶ 15(a)-(b).
41
may have caused were outside of and unrelated to Charney’s corporate powers, to the
extent he still retained any such powers. 103 As discussed above, Charney could have
committed such breaches without the aid of his prior (or current) status with the
Company. The ultimate issue is whether the claims alleged in the Standstill Proceeding
are causally connected to any fiduciary-based misconduct. In my opinion, they are not.
*****
In sum, for the reasons explained above, I conclude that Charney is not entitled to
advancement under the Charter or under the Indemnification Agreement.
E. Charney is Not Entitled to Indemnification for This Action
Section 4 of the Indemnification Agreement requires the Company to “indemnify
[Charney] against any and all Expenses . . . which are incurred by [Charney] in
connection with any action brought by [Charney] for . . . an Expenses Advance under this
Agreement . . . .” 104 At common law, “a person who successfully prosecutes a claim
under 8 Del. C. § 145 is typically entitled to recover the reasonable expenses incurred in
connection therewith unless the corporation precludes such recovery upfront in the
governing document or contract providing for indemnification.” 105 Given my
103
See Lieberman v. Electrolytic Ozone, Inc., C.A. No. 10152-VCN, at 16 (Del. Ch. Aug.
31, 2015) (finding that “[p]laintiffs’ conduct as [company] officers, directors, or
employees is essentially immaterial to” subsequent breach of contract claims against
them).
104
Def.’s Ex. 2 (Indemnification Agreement) at § 4.
105
Blankenship, 2015 WL 3408255, at *28 (citing Stifel Fin. Corp. v. Cochran, 809 A.2d
555, 561 (Del. 2002)).
42
conclusions above, Charney is not entitled to summary judgment on Count II because he
has not successfully prosecuted his claim for advancement for the Standstill Proceeding.
III. CONCLUSION
For the foregoing reasons, Plaintiff’s motion for summary judgment is DENIED,
and Defendant’s motion for summary judgment is GRANTED. The parties are directed
to confer and to inform the Court within five business days as to whether there is any
reason a final judgment should not be entered given the rulings in this opinion, and to
submit a form of order implementing those rulings.
43
Dov Charney v. American Apparel, Inc.
Combined Opinion