Mark S. Davis v. EMSI Holding Company

EFiled: May 03 2017 03:25PM EDT
Transaction ID 60552075
Case No. 12854-VCS
IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

MARK S. DAVIS and :
ROBERT P. BROOK, :
:
Plaintiffs, :
:
v. : C.A. No. 12854-VCS
:
EMSI HOLDING COMPANY, :
:
Defendant. :

MEMORANDUM OPINION

Date Submitted: February 8, 2017
Date Decided: May 3, 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
 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.

1
 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

1
Weinstock v. Lazard Debt Recovery GP, LLC, 2003 WL 21843254, at *2 (Del. Ch. Aug. 8,
2003) (deciding motion for summary judgment in advancement case based on underlying
complaint and applicable corporate documents).

2
(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

2
EMSI Acq., Inc. v. Contrarian Funds, LLC, C.A. No. 12648-VCS (Del. Ch. May 3, 2017).

3
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

4
 “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.

3
Transmittal Aff. of Toni-Ann Platia in Supp. of Pls.’ Mot for Summ. J. (“Platia Aff.”) Ex.
A (“EMSI Holding Bylaws”) § 7.1.
4
Platia Aff. Ex. B (“SPA”) § 6.5.
5
SPA § 6.5.

5
 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.

6
Marino v. Patriot Rail Co., 131 A.3d 325, 346 (Del. Ch. 2016) (“The scope of an
individual’s advancement rights normally turns on the pleadings in the underlying litigation
that trigger the advancement rights.”).

6
 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

7
Ct. Ch. R. 56(c).
8
Williams v. Geier, 671 A.2d 1368, 1375 (Del. 1996).
9
United Rentals, Inc. v. RAM Hldgs., Inc., 937 A.2d 810, 830 (Del. Ch. 2007).
10
Id. (emphasis in original).
11
Weinstock, 2003 WL 21843254, at *2.

7
 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

12
SPA § 10.10(a).

8
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 stand-

alone 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

13
Def.’s Answering Br. in Opp’n to Pls.’ Mot. for Summ. J. (“Answering Br.”) 18.

9
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 reveals that the

parties intended the waiver language to apply when a party asserts an extra-

contractual claim for advancement in defense of a claim (rather than in prosecution

of a claim) for indemnification under the SPA.14

Defendant next argues that Section 12.3 of the SPA is an express adoption of

the American Rule for all intra-party disputes and that it must be read as a waiver of

advancement in connection with all litigation arising under the SPA. Here again,

the clear and unambiguous terms of the provision Defendant has invoked reveal the

flaw in the argument. Section 12.3 states, in full, that “[e]xcept as otherwise

14
In its Answer to the Verified Complaint, Defendant also pointed to a release provision
(Section 3) in the Termination and Release Agreement executed by Plaintiffs in connection
with the Acquisition as further support of its waiver argument. That argument merited only
a footnote in Defendant’s Answering Brief in Opposition to Plaintiffs’ Motion for
Summary Judgment. Answering Br. 19, n.9. In any event, I agree with Plaintiffs that the
carve-out within Section 3 makes clear that Plaintiffs did not waive their right to
advancement in that document.

10
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.”15 Plaintiffs,

unsurprisingly, point to the lead-in clause of the provision and argue that there is, in

fact, another provision in the SPA that “otherwise expressly provide[s] . . .” by

clearly and unambiguously carving out Plaintiffs’ right to advancement. For reasons

I address below, I agree. There has been no waiver here.

2. Plaintiffs Preserved Their Right to Advancement for Claims
Related to the SPA

Section 6.5 contains a broad release of claims stating, in part, that “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 . . .” Section 6.5 goes on to carve out

specific claims from this general release including “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 . . .”

15
SPA § 12.3.

11
 Defendant contends that Section 6.5’s carve-out only addresses the right of

the Company’s directors and officers to pursue pre-existing indemnification

obligations with respect to third-party claims unrelated to the SPA and does not

include a separate and distinct right to advancement. Defendant’s position can be

broken down into two arguments. First, to the extent Plaintiffs’ indemnification

rights are carved out by Section 6.5, these rights are only preserved for third-party

claims unrelated to the SPA and not for first-party claims related to the SPA.

Second, even if the Court disagrees with this construction, Plaintiffs’ pre-existing

right to indemnification does not include a right to advancement.

Defendant’s first argument, that the carve-out does not apply to first-party

claims related to the SPA, ignores the language upon which it is based. As

Defendant’s counsel acknowledges, Section 6.5 begins with a release by the Sellers

of first-party claims they may have had against the EMSI entities.16 Despite this

acknowledgement, Defendant would have the Court interpret the carve-out, which

appears in the very same provision as the release of first-party claims, to apply only

to third-party claims and any first-party claims unrelated to the SPA.17 Defendant

16
Oral Arg. on Pls.’ Mot. for Summ. J. (“Oral Arg.”) at 62 (“Your Honor, my
understanding is that the sellers here are releasing first-party claims that they may have
against any of the EMSI entities.”).
17
When asked at oral argument to cite an example of a first-party claim that would survive
by virtue of the carve-out, counsel responded that a breach of fiduciary duty claim that was
unrelated to the SPA would fit within the carve-out. When prodded to provide more detail,
counsel described a hypothetical in which the directors were being sued for a breach of the
12
argues that such an interpretation is necessary in order to avoid rendering other

provisions of the SPA, most notably Section 10.10(a) and Section 12.3, meaningless.

In Defendant’s view, if the carve-out applies to first party claims related to the SPA,

and therefore the right to be indemnified and to have fees advanced is available even

in disputes between the parties to the SPA, then the sole and exclusive remedy

provision of Section 10.10(a) and the express adoption of the American Rule in

Section 12.3 are effectively read out of the contract.

For reasons already explained, Defendant’s interpretation of Sections 10.10(a)

and 12.3 does not comport with their clear terms. Moreover, a construction of

Section 6.5 that recognizes Plaintiffs’ right to pursue advancement against the

Company fits perfectly within the schemes actually memorialized within

Sections 10.10(a) and 12.3. As previously stated, Section 10.10(a) limits the

remedies of the parties when prosecuting claims under the SPA while Section 12.3

provides that in most situations, other than those otherwise expressly provided for

elsewhere in the SPA, the parties will be responsible for their own fees and expenses.

Interpreting the carve-out in Section 6.5 as preserving Plaintiffs’ right to ultimate

indemnification and advancement does not conflict with these provisions in any way

duty of loyalty based on a related party transaction. When asked whether this scenario
actually reflected a carve-out that would have been contemplated by the parties, given that,
at least in the derivative context, the breach of fiduciary duty claims would be extinguished
by the transaction, there was no meaningful response. See, Oral Arg. at 66–68.

13
because Plaintiffs are enforcing an extra-contractual right in defense of a claim and

therefore are not prosecuting a claim arising under the SPA in violation of

Section 10.10(a). And they are asserting their advancement rights in a way

“otherwise expressly provide[d]” for in the SPA consistent with Section 12.3.

Section 6.5, entitled “Release,” begins with a release of first-party claims and

then goes on to carve-out certain claims. In so doing, the parties defined the universe

of claims they may have had against one another, released most of those claims using

broad language and then defined any claims that remained pursuant to the carve-out.

The fact that the carve-out in which the parties identified claims that would survive

the broad release appears in the same provision in which the parties expressly

released first-party claims they may have had against one another makes clear that

the carve-out was intended to apply to those first-party claims that would otherwise

have been released.

Defendant’s second argument that Plaintiffs did not preserve their right to

advancement in the SPA is equally unpersuasive. Defendant argues that to the extent

the carve-out does apply to first-party claims, Plaintiffs preserved their right to

indemnification but not to advancement. To support its argument, Defendant asserts

that if the parties had intended to preserve both advancement and indemnification

rights, they easily could have included the language “advancement and

indemnification” in Section 6.5.

14
 As a matter of prudent drafting, Defendant’s point is well taken as its proffered

language almost certainly would have foreclosed its resistance to the Plaintiffs’

claims here. Even so, it cannot be said that the SPA reveals the parties’ intent to

shut down Plaintiffs’ right to advancement simply because Section 6.5 fails to spell

out that both advancement and indemnification rights were being preserved. In fact,

an identical argument was made and ultimately rejected by the court in Sodano v.

American Stock Exchange LLC.18 There, the defendant argued that plaintiff’s claim

for advancement did not survive a settlement agreement because “if the Agreement

was intended to preserve Sodano’s advancement and ultimate indemnification rights,

the parties could have easily written ‘advance and indemnify.’”19 The court found

that argument unpersuasive because nothing in the agreement’s reference to only

indemnification revealed an intent to foreclose claims for advancement.20 That

reasoning applies with equal force here.

The right to advancement under Section 6.5 is best discerned by what that

provision says, not by what it does not say. As noted, the relevant portion of

Section 6.5 states that “[n]othing 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

18
2008 WL 2738583 (Del. Ch. July 15, 2008).
19
Id. at *10.
20
Id.

15
officer or director (or former officer or director), under the Governing Documents

of the applicable EMSI Entity . . .” Plaintiffs direct the Court to the Company’s

bylaws and argue that it is clear from that governing document that the parties

understood the concept of indemnification to incorporate advancement and that this

understanding carried over into the SPA. Defendant disagrees and argues that

Plaintiffs have failed to offer any bases upon which the Court could leap from its

construction of the term “indemnification” in the bylaws to that same construction

of “indemnification in the SPA . . .”21

The reason to turn to the EMSI bylaws when construing the term

indemnification is apparent in the clear terms of Section 6.5, which provide that the

carve-out set forth there applies to “any right to indemnification . . . under the

Governing Documents of the applicable EMSI Entity . . .” Undeterred and

notwithstanding this language, Defendant proffers two reasons why the Court should

decline to turn to the EMSI “Governing Documents.” First, Defendant notes that

there are two EMSI entities, EMSI Holding Company and EMSI Inc. Defendant

points out, correctly, that only the bylaws of EMSI Holding Company provide a right

to advancement; any such right is absent from the bylaws of EMSI Inc.

Consequently, if the Court applies a different meaning to the term “indemnification”

21
Answering Br. 26.

16
from the different governing documents of the two EMSI entities, then the term

“indemnification” in Section 6.5 would likewise have multiple meanings—an

unreasonable construction. Once again, Defendant has ignored the clear and

unambiguous language of the SPA. Section 6.5 expressly contemplates that

Company directors and officers shall continue to enjoy the right to indemnification

that may exist within the governing documents “of the applicable EMSI Entity. . .”22

The determination of which EMSI entity is the “applicable” EMSI entity for

purposes of assessing the right to advancement necessarily depends on the nature of

the claims the director or officer has been called upon to defend. Any other

construction would ignore the plain language of the carve-out.23

Defendant also insists that defining “indemnification” in Section 6.5

differently than the term is defined in other provisions of the SPA (such as in

Article X) is unreasonable because nothing in the SPA indicates that the parties

intended that the term would have different meanings within the same contract.

Defendant fails to appreciate, however, that the type of indemnification discussed in

Section 6.5 is distinct from the type of indemnification addressed by other provisions

in the SPA. By its clear and unambiguous language, Section 6.5 refers to any right

22
SPA § 6.5 (Emphasis added).
23
For reasons I explain below, it is appropriate in this instance for Plaintiffs to look to the
governing documents of EMSI Holding Company.

17
to indemnification under the governing documents of the applicable EMSI entity.

Other sections of the SPA, such as Article X, set forth the parties’ rights to

contractual indemnification as created by the SPA itself. Therefore, because it is

evident on the face of the SPA that the meaning of indemnification under Section 6.5

is wholly distinct from any other meaning of that term as used in other parts of the

SPA, it is not unreasonable to construe the term differently in each context. Indeed,

in light of the plain meaning of the SPA’s terms, it would be unreasonable to assign

the same definition to the term “indemnification” throughout the document.

Finally, Defendant argues that even if Plaintiffs preserved a right to

indemnification under the EMSI bylaws, the language in the carve-out is not broad

enough to also encompass any right to advancement. Defendant highlights that

Delaware law treats indemnification and advancement as separate rights and

contends that the EMSI bylaws do as well. A determination of whether the language

of the carve-out is broad enough to encompass a right to both indemnification and

advancement requires reading the language used in Section 6.5 together with the

language of the bylaws which are the source of that right.24

24
To reiterate, the language of the carve-out in Section 6.5 states that “[n]othing 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 . . .”

18
 Turning to the EMSI Holding Company bylaws, Article VII entitled

“Indemnification” begins with Section 7.1, “Right to Indemnification.”25 After

recognizing a right to indemnification, Section 7.1 then explains the contours of that

right by stating that “[t]he 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 . . .”26 Plaintiffs point to Sodano in support of their

argument that this language within Section 6.5 is broad enough to capture the right

to both advancement and indemnification as set forth in Section 7.1 of the EMSI

Holding Company bylaws. As noted above, in Sodano, the court faced the identical

25
Defendant argues that while both Plaintiffs were officers and directors of both EMSI
Holding Company and EMSI Inc., the operating subsidiary, the alleged fraud only occurred
at the operating subsidiary level. This is crucial, Defendant contends, because the bylaws
of EMSI Inc. do not provide for any right to advancement. Because that is the entity where
the fraud occurred, Defendant argues that the bylaws of EMSI Inc. are the “Governing
Documents of the applicable EMSI entity” to which the Court should look when applying
the carve-out in Section 6.5. As Plaintiffs point out, however, the complaint in the
underlying action alleges a wide-ranging fraudulent scheme perpetrated by Plaintiffs while
they were serving as officer and directors of both entities and makes no effort to distinguish
between entities when describing the fraud. See Compl., C.A. No. 12648-VCS, at ¶¶ 3, 10,
53, 61, 62, 108, 161, 166, 180, 181. Indeed, in its own answering brief, Defendant asserts
“to be clear, Buyer has asserted that Davis, Brook, and others, as directors and officers of
HoldCo [EMSI Holding], possessed knowledge that HoldCo’s SPA representations were
false. However, when it comes to the actual fraudulent conduct evidence, as opposed to
state of mind evidence, that conduct was undertaken at EMSI Inc.” Answering Br. 14–15.
While Defendant would have the Court attempt to compartmentalize these Plaintiffs’
fraudulent acts by the different corporate hats they may have been wearing at any given
time, this exercise makes little sense in the advancement context.
26
EMSI Holding Bylaws § 7.1.

19
issue of whether an indemnification carve-out preserved both the indemnification

and advancement rights of a former officer and director or only the right to

indemnification if successful in the underlying litigation. The carve-out at issue

there provided that the corporation “[would] indemnify . . . to the fullest extent

permitted by law and the [company’s] organizational documents.”27 After noting

that the issue of how broadly to construe the term “indemnification” in a contractual

carve-out was not novel, the court concluded that the language, “to the fullest extent

permitted . . . by the [company’s] organizational documents,” was best read as

intending to cover both advancement and ultimate indemnification.28

Sodano is on all fours with this case. The language of Section 6.5 states that

the carve-out applies to “any right to indemnification” which, like the phrase “to the

fullest extent permitted,” is very broad. The bylaws, likewise, use the term

“indemnification” broadly. Indeed, as was the case in Sodano, the right to

advancement within the EMSI bylaws appears in a section entitled only

“indemnification,” a fact that was persuasive to the court in Sodano.29 Perhaps even

more persuasive, the bylaws state that “[t]he right to indemnification conferred in

27
Sodano, 2008 WL 2738583, at *10.
28
Id. at *11.
29
Id. (“The broad uses of ‘indemnification’ include titling the article that grants both
advancement and ultimate indemnification using only ‘indemnification’ . . .”).

20
this Article VII . . . 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 . . .”30 The bylaws are clear, therefore, that the indemnification

to which officers and directors are entitled includes the right to have their fees

advanced.31

3. Plaintiffs are Parties to the Underlying Action “By Reason Of”
Their Status as Officers or Directors of the Company

Defendant next argues that even if the Court concludes that Plaintiffs have not

waived their right to advancement, and that the right has been preserved in the SPA

through the EMSI Holding Company’s bylaws, the Plaintiffs still are not entitled to

advancement because they were not sued “by reason of” their status as officers and

directors of EMSI Holding Company. In support of this argument, Defendant

30
EMSI Holding Bylaws § 7.1 (emphasis added).
31
Defendant argues that to the extent the Court finds Sodano persuasive, it should deny
summary judgment in order to allow them to take discovery. Defendant insists that this is
appropriate because the court in Sodano had the benefit of limited discovery in construing
the provisions of the release and carve-out at issue there. While it is true that the parties in
Sodano had engaged in limited discovery, the court ultimately found it unnecessary to
resort to that extrinsic evidence when construing the contractual language at issue. In fact,
the court concluded that the “clear intention of the parties as evident in the language of the
NASD Settlement Agreement and Release and the NASD Certificate . . . was that Sodano
would retain both his advancement and ultimate indemnification rights . . .” Sodano, 2008
WL 2738583, at *12. The court went on to characterize the defendant’s argument that the
language should be interpreted as referring only to indemnification as a “non-sanctionable
argument”—hardly a ringing endorsement of the defendant’s proffered construction. Id.
In this case, I see no reason to “kick the can down the road” to allow the Defendant to take
discovery only to confirm what is evident on the face of the SPA and the operative bylaws.

21
attempts to invoke a line of cases in this court that have held that claims for breaches

of “personal contractual obligations” are not brought “by reason of” the plaintiff’s

status as an officer or director. The cases are inapposite.

The most notable case in the line, and the one on which Defendant principally

relies, is Cochran v. Stifel Financial Corp.32 In Cochran, the court concluded that

a corporate officer was not entitled to indemnification on a claim that he failed to

repay a promissory note because that suit was not brought against the officer in his

“official capacity” or by reason of the fact that he was an officer of the company.33

Rather, the plaintiff had acted in a personal capacity to bind himself to a personal

obligation owed to the corporation. Defendant argues that, just as in Cochran, the

claim for which the former directors and officers of EMSI are being sued in the

underlying action has been brought against them in their personal capacity as sellers

of stock and therefore represents a claim for breach of a personal contractual

obligation.

Our Supreme Court has set forth the test for determining when a covered

person has been sued “by reason of” his official capacity stating that “if there is a

nexus or causal connection between [a claim] and one’s official capacity, those

32
2000 WL 1847676 (Del. Ch. Dec. 13, 2000), aff’d in relevant part, 809 A.2d 555 (Del.
2002).
33
Id. at *6.

22
proceedings are ‘by reason of the fact’ that one was a corporate officer, without

regard to one’s motivation for engaging in that conduct.”34 Under this test, “the

requisite connection is established if the corporate powers were used or necessary

for the commission of the alleged misconduct.”35 As this court has previously

observed, the Cochran line of cases is consistent with this “overarching test” for

determining when a suit is an “official capacity” suit.36 Defendant’s attempt to

invoke Cochran here as a means to avoid its advancement obligation is just the latest

example of a corporate defendant attempting to broaden that decision beyond its

intended reach and beyond its own rationale.37 Cases following Cochran have

clarified its scope and make clear that the underlying claim in this case has been

34
Homestore, Inc. v. Tafeen, 888 A.2d 204, 215 (Del. 2005).
35
Paolino v. Mace Sec. Intern., Inc., 985 A.2d 392, 406 (Del. Ch. 2009) (internal citations
and quotation marks omitted).
36
Id. (“Cochran, Reddy, and Zaman are thus fully consistent with the overarching test
announced by our Supreme Court for determining when a covered person has been sued
‘by reason of’ his or her official capacity . . .”).
37
Id. at 404 (“As this case and others . . . demonstrate, corporations bent on limiting their
exposure to mandatory indemnification and advancement provisions sought to read
Cochran broadly as saying that if an individual agrees to serve in a covered capacity
pursuant to an employment agreement, then his duties become a personal contractual
obligation.”). See also, Holley v. Nipro Diagnostics, Inc., 2014 WL 7336411, at *9 n.35
(Del. Ch. Dec. 23, 2014) (“Indeed the Court in Paolino explicitly observed that defendant
corporations were misreading cases like Cochran in an often unproductive effort to avoid
paying the mandatory advancement and indemnification to which they previously
agreed.”).

23
brought by reason of the fact that Plaintiffs in this action were officers and directors

of EMSI.

For example, in Reddy v. Electronic Data Sys. Corp.,38 the author of Cochran,

then-Vice Chancellor Strine, highlighted the importance of focusing on the

allegations in the underlying proceeding. He stated, “[c]ritically, the Cochran case

did not . . . involve a situation in which the officer’s alleged breach of his

employment agreements was argued to be the identical conduct that was averred to

be a breach of fiduciary duty.”39 Similar to Reddy, in this case, the conduct that is

alleged to be a breach of the SPA is the same conduct through which Plaintiffs are

alleged to have misused their corporate powers. And, as in Reddy, Plaintiffs will

ultimately be obligated to repay the amounts advanced if they are not entitled to

indemnification. Therefore, the concerns about the circularity of payments from the

corporation to a defendant that is alleged to have breached a personal contractual

obligation “that existed in Cochran [but] did not exist in Reddy”40 likewise do not

exist here. In fact, this concern about circularity, which Defendant has expressed,

“has little purchase in the advancement context because the covered person is always

38
2002 WL 1358761 (Del. Ch. June 18, 2002).
39
Id. at *7. Also critical to the Reddy court was that “the Cochran case did not involve
any claim for advancement. . .” Id.
40
Paolino, 985 A.2d at 406.

24
obligated to repay the fees advanced if not ultimately entitled to indemnification,

thereby eliminating the problem of circularity.” 41 In Reddy, therefore, the court

concluded that the former officer was “entitled to advancement for actions brought

against him in an official capacity, notwithstanding the framing of the claims as

breaches of contract.”42 That same analysis applies here.

Providing further support to the conclusion that Plaintiffs here are being sued

in the underlying action by reason of the fact they served as officers and directors is

then-Vice Chancellor Strine’s further elucidation of Cochran in Zaman v. Amedeo

Holdings, Inc.43 In that case, the court rejected an argument by the corporation based

on Cochran that the former officers were not entitled to advancement by noting that

the claims brought against them were “grounded in [the former corporate officers’]

alleged misuse of the substantial fiduciary responsibility they were given as key

managerial agents.”44 In distinguishing Cochran, the court explained that it was not

the case that the plaintiffs were “alleged to have committed merely a breach of a

specific term of a contract.”45 Again, the court stressed that if the defendants in the

41
Id.
42
Id.
43
2008 WL 2168397 (Del. Ch. May 23, 2008).
44
Id. at *28.
45
Id.

25
underlying action were ultimately unsuccessful in defending their actions, they

would not be entitled to indemnification or to keep the amounts advanced.

The same holds true here. The allegations in the underlying action against

Plaintiffs are that they misused their positions as officers and directors of the

Company in order to engage in a widespread fraud that involved the manipulation

of the Company’s business model and related financial reports for the purpose of

facilitating a sale of the Company at an exaggerated price. These allegations,

couched as breaches of representations and warranties in the SPA, are not merely

allegations that Plaintiffs have breached specific contractual terms personal to them.

Instead, Plaintiffs will be required to defend their actions as officers and directors of

the Company and their alleged intentional abuse of their corporate powers.

When a corporation seeks to avoid an officer’s demand for advancement on

the ground that the claim the officer is defending is not an advanceable claim, in

order to prevail, the claim at issue “must clearly involve a specific and limited

contractual obligation without any nexus or causal connection to official duties.”46

46
Paolino, 985 A.2d at 407.

26
The claims in the underlying action are not nearly so limited.47 Plaintiffs are entitled

to advancement as they defend these claims.48

47
I note that even if this issue were a closer call, this court has previously stated that “[i]n
advancement cases, the line between being sued in one’s personal capacity and one’s
corporate capacity generally is drawn in favor of advancement with disputes as to the
ultimate entitlement to retain the advanced funds being resolved later at the indemnification
stage.” Holley, 2014 WL 7336411, at *9.
48
Defendant further contends that even if Davis may be entitled to advancement, former
director and officer Brook has no right to advancement for his conduct at EMSI Inc. I
relegate discussion of this argument to a footnote because it can be dismissed summarily.
As Plaintiffs have pointed out, Brook is serving as an officer of the operating company,
EMSI Inc., at the request of the holding company. Section 7.1 of EMSI Holding
Company’s bylaws extends the right to indemnification (which, as explained above,
includes the right to advancement) to each person who is made party to a suit and has
served “at the request of the Corporation as a director, trustee, officer . . . of another
corporation . . .” Therefore, if Brook is serving as an officer of EMSI Inc. at the request of
EMSI Holding Company, he is entitled to both indemnification and advancement under
the bylaws. Defendant argues that Plaintiffs have provided no evidence that Brook was
serving at the request of EMSI Holding Company. Not so. Brook’s employment
agreement with EMSI Holding Company clearly states that “if elected, appointed or
designated, Executive shall hold . . . a seat on the Board, and such other offices,
directorships or memberships of committees of the Company, Examination Management
Services, Inc., a Nevada corporation and wholly-owned subsidiary of the Company . . .”
Transmittal Aff. of Toni-Ann Platia in Further Supp. of Pls.’ Mot. for Summ. J. Ex. I
(“Employment Agreement”) § 3. Brook, therefore, was contractually obligated to serve as
an officer of EMSI Inc. at the request of EMSI Holding Company, a factual point that
Plaintiffs have established through the clear and unambiguous language of Brook’s
employment agreement and the Company’s bylaws. Under our law, the burden has now
shifted to Defendant to put forth some evidence that puts this fact into dispute. See, Moore
v. Sizemore, 405 A.2d 679 (Del. 1979). Defendant has not provided any explanation for
how Brook might have come to be an officer of EMSI Inc. if not at the request of the
holding company for which he worked and to whom he owed a contractual obligation to
serve at the operating subsidiary upon request. Nor have they identified in their Rule 56(f)
Affidavit any basis to believe that some other explanation may exist in the discovery they
seek to take.

27
 C. Plaintiffs have Perfected Their Right to Advancement and are Entitled to
Fees on Fees

In a last ditch effort to avoid advancement, Defendant argues that, even if the

Plaintiffs may have a right to advancement for some of their fees and expenses, their

claim must be dismissed for failure to make a proper advancement demand.

Defendant’s only gripe with Plaintiffs’ demand is that they have not yet detailed the

precise amounts of advancement they are seeking. As Plaintiffs correctly point out,

however, Defendant has denied that Plaintiffs are entitled to any advancement at all.

Therefore, it would have made little sense for Plaintiffs to have submitted detailed

invoices with specific advancement requests when Plaintiffs were aware that

Defendant intended to resist Plaintiffs’ right to advancement of any amounts as a

threshold matter. Indeed, in light of their strenuous resistance to Plaintiffs’

advancement demand, Defendant’s contention that, having now successfully

litigated their right to advancement, Plaintiffs’ claim should nonetheless be

dismissed on technical grounds comes with ill grace.49

49
This court has previously discussed the negative consequences of dismissing
advancement claims on such grounds. See, Reddy, 2002 WL 1358761, at *8 (“To permit
EDS to escape its advancement duties on this hyper-technical ground would invite abuse.”)
(citing VonFeldt v. Stifel Fin. Corp., 714 A.2d 79, 84–85 (Del. 1998)) (eschewing undue
formalism and hyper-technical readings of Section 145, which would contradict the
statute’s policy objectives).

28
 Plaintiffs are entitled to advancement. The next step is to devise a set of

procedures that will be used by the parties at the direction of the Court to manage

Plaintiffs’ specific demands for advancement and to settle any disputes regarding

the amounts requested.50 Plaintiffs are also entitled to fees on fees.51 That the exact

amount of fees on fees to which Plaintiffs are entitled may not yet be fully

determined does not alter that right based on their success here. And finally,

Plaintiffs are entitled to prejudgment interest from the date on which they made their

demand.52

III. CONCLUSION

For the foregoing reasons, Plaintiffs are entitled to advancement under the

plain and unambiguous terms of the SPA and the applicable bylaws in defending

against the claims brought in the underlying action by reason of the fact that they

served as officers and directors of the Company. Therefore, Plaintiffs’ motion for

50
See, e.g., Danenberg v. Fitracks, Inc., 58 A.3d 991 (Del. Ch. 2012).
51
Blankenship v. Alpha Appalachia Hldgs., Inc., 2015 WL 3408255, at *28 (Del. Ch.
May 28, 2015).
52
Defendant opposes an award of prejudgment interest as “premature” since Plaintiffs have
not detailed the precise amount of fees they are seeking. Defendant has not cited any legal
authority for this position and I am aware of none. Because I have concluded that Plaintiffs
made a proper advancement demand, their request for prejudgment interest dating back to
that demand is appropriate.

29
summary judgment is GRANTED. Plaintiffs shall submit an implementing order,

on notice to Defendant, within ten (10) days.

30