Individuals serving as corporate officers take on significant potential liability exposures in the performance of their duties. As a result, most companies provide their officers with advancement, indemnification, and insurance protection for liabilities incurred while acting as corporate officers. However, it is not always clear who is an “officer” for purposes of claiming the benefits and protection. In a recent decision, the Delaware Chancery Court addressed the question whether two former executives of Unisys were “officers” entitled to advancement rights under the company’s bylaws and under Delaware Corporate law. The context of the court’s inquiry is interesting and in addressing the questions presented the court undertook a broad review of advancement rights generally. The court’s conclusion that the two individuals were officers entitled to advancement rights is also interesting and has important implications for other contexts, including the D&O insurance context.
The court’s August 13, 2024, opinion can be found here. Hat tip to the Delaware Corporate & Commercial Litigation Blog for the August 23, 2024, post (here) discussing and linking to the court’s opinion.
Background
Leon Gilbert and Michael McGarvey joined Unisys in early 2021 to help build the company’s new Digital Workspace Solutions (DWS) unit. Gilbert held the title of Senior Vice President and McGarvey held the title of Vice President. In early 2023, Gilbert and McGarvey left Unisys to return to their prior employer, Atos, a French information technology company. Unisys filed a lawsuit in Pennsylvania federal court alleging among other things that the two individuals had stolen Unisys information. The two individuals sought advancement from Unisys in order to defend themselves in the Pennsylvania action. Unisys contended it has no obligation to advance their costs of defense. The individuals filed an action in Delaware Chancery Court seeking a judicial determination that they were entitled to advancement rights. The parties’ dispute ultimately went to a one-day trial.
The company’s certificate of incorporation provided for advancement and indemnification of officers, but that the certificate did not define the term officers. The company’s bylaws define two categories of company officers: officers who are expressly identified by title (whom the court described as “mandatory officers”), named as “a Chief Executive Officer, a President, one or more Vice Presidents, a Secretary, a Treasurer and a Controller”; and “other officers as may be elected at the Board’s discretion,” whom the court described as “discretionary officers.” At the time the two individuals were employed at Unisys, the company had over 150 individuals with the title Vice President. The board, the court said, did not formally elect all of these individuals as officers. Neither of the two individuals were formally elected as officers by the Board.
Some further background provides important context for the advancement question. Gilbert was hired by Unisys in early 2021 to head up its DWS unit. In that role, Gilbert had about 6,500 employees under his management. During his time at Unisys, Gilbert also served as one of 15 member of the company’s Executive Leadership Team. During his time at Unisys, Gilbert recommended that the company acquire Unify Square, Inc., which the company did at the cost of about $155 million. Following the acquisition, Unify Square became a subsidiary of Unisys, and Gilbert was appointed by the Unify Square board as President of Unify Square. Unify Square ultimately was merged into Unisys.
Soon after arriving at Unisys, Gilbert recommended that the company hire McGarvey, which the company did. During his time at Unisys, McGarvey functioned as the chief technology officer of the DWS unit, although he had no formal title as such.
In early 2023, after two years running the DWS unit, Gilbert and McGarvey returned to Atos, where they had worked before joining Unisys. In February 2023, Unisys sued the two individuals in Pennsylvania federal court, alleging that the two had improperly solicited Unisys talent to Atos and had, prior to their departure, downloaded thousands of pages of proprietary and confidential Unisys documents.
The two individuals sought advancement from Unisys of their costs of defense. Unisys refused on the grounds that the two had not been “officers” of the company and therefore were not entitled to advancement. The two individuals then sought advancement from Atos, which agreed to advancement for the two individuals conditioned on the individuals’ seeking advancement and indemnification from Unisys. The court’s opinion recites that Atos and its insurer had advanced approximately $4.5 million of the individuals’ fees incurred in defending the Pennsylvania action.
The August 13, 2024, Opinion
In a lengthy and detailed post-trial August 13, 2024, opinion, Vice Chancellor Paul R. Fioravanti, Jr. ruled that the two individuals were entitled to advancement.
With respect to the individuals’ arguments that they were officers of Unisys, the court said that the bylaws descriptions of the two categories of officers was “at a minimum” ambiguous. The individuals argued under the doctrine of contra proferentem that the ambiguity must be construed in the favor, a proposition with which the court agreed, in reliance on prior cases discussing advancement issues, included the Pulier case (discussed here) and the Aleynikov case (discussed here).
After a long discussion of the various precedents and a carefully parsing of the differences of language involved in the various by law provisions at issue in the cases, the court noted the following:
A reasonable person standing in the shoes of a prospective indemnitee like Gilbert or McGarvey ought to be able to look at the advancement provisions in the Certificate and the description of officers in the Bylaws and clearly determine whether they are entitled to advancement. … Were a prospective officer to read a corporation’s certificate and bylaws, they should be able to rely on a reasonable interpretation thereof. One can easily imagine a prospective officer reading the Bylaws, seeing that vice presidents “shall” be officers, and concluding that they would be an officer entitled to advancement. Here, consistent with the persuasive reasoning in Aleynikov, the court finds that reasonable individuals who are hired as Unisys Vice Presidents by persons with authority to bestow the title can reasonably conclude under the Bylaws that they are officers of the Company.
The Vice Chancellor added the observation that “Delaware’s policy supports the approach of resolving ambiguity in favor of indemnification and advancement,” noting further “That [the company] doled out Vice President titles to dozens of employees is of its own doing. [The company] easily could have clarified whether or not the title ‘Vice President’ was an officer title for purposes of advancement and indemnification.” The corporation did not, therefore, the court held, the ambiguity must be resolved in the individuals’ favor.
Discussion
The question of whether or not a particular individual is an officer entitled to advancement or indemnification is a frequently recurring issue. Although the contexts involved in the disputes vary, the most common question is the one involved here, which is whether an individual with the title of “Vice President” is entitled to advancement or indemnification. The question comes up so frequently because many companies, arguably like to the one involved here, are profligate in bestowing the Vice President title.
One clear message that emerges from the court’s consideration of the issues involved here is that whether or not an individual is entitled to advancement or indemnification is going to depend on a fact and context specific analysis, involving both the specifics of the language authorizing the benefits and the specifics of the individual’s role at the company (as well as the specifics of the individual’s hiring and functioning).
These kinds of disputes arguably could be minimized through greater clarity in the relevant authorizing language. As the court noted, an individual ought to be able to read the authorizing language and know whether or not he or she is entitled to advancement or indemnification. This is particularly true with the recurring questions about individuals with the title of Vice President; the authorizing language ought to be clear on this point. This observation underscores a related point, which is that the time to address these issues is when the foundational documents are being prepared – and not to try to sort all of this out later when a dispute has arisen.
The reason why the company fought so hard to avoid having to advance the individuals’ defense costs is pretty obvious. The company was mad at the two, having accused them of taken important intellectual property with them when they left, to the benefit of a competitor. The last thing the company would want to do is to have to advance the costs of defending against a lawsuit that the company itself had brought.
But while I get why the company would not want to advance the individuals defense costs, and while I do not doubt that the company sought to resist the advancement requests in good faith, it is a bit of a stretch to argue that someone that was on the executive leadership committee and ran a unit with 6,500 employees is not an officer. Maybe the argument was a closer one for McGarvey but it seems like a tough argument with respect to Gilbert.
It is noteworthy to me that while the company and the individuals were tangled up in this advancement dispute, Atos (and its insurer, it should be noted) had no problem agreeing to advancing the individuals’ defense costs, conditioned on their seeking to obtain advancement from Unisys. Perhaps the Atos advancement agreement is clearer; perhaps when the two individuals returned to Atos, they were focused on the advancement issue and they secured advancement commitments. It is also noteworthy that Atos, unlike Unisys, was not the one prosecuting the very lawsuit for which advancement was sought.
These kinds of questions are not limited just to the indemnification and advancement context. Many of these issues may also arise in the context of D&O insurance as well. The question of whether not a particular individual is or is not an insured person under the policy is a frequently recurring issue, particularly where lower-level employees are involved. This question may be less of an issue in a private company D&O Insurance policy, where the policies broad standard definition of insured persons often includes employees.
Under a public company D&O policy, employees may also be insured persons for purposes of Securities Claims. But where the claim involved is not a Securities Claim, difficult questions can arise. Under a public company D&O insurance policy outside of the Securities Claim context, employees typically are not included in the definition of insured persons. Rather, the policy will typically define an insured person as a “duly elected or appointed director or officer” or similar words. The problem is, as this case illustrates, it is often unclear whether or not, as a Vice President, an individual would come within this definition. One way some companies will choose to address this policy is to request that the policy be specially endorsed to specify that persons holding specific titles or offices are insured persons within the meaning of the policy.
Of course, board member and senior executives may not want their company’s D&O insurance to be eroded by claims raised against lower-level employees. This concern would be particularly magnified in a situation like this one where the claim against the lower-level employee is that he misappropriated intellectual property belonging to the company. All of which underscores that there are certain fundamental tensions and even conflicts of interest involved in (and perhaps inherent in) both indemnification and insurance arrangements. Some of those with potential interests in indemnification and insurance would like to see those benefits made broadly available. Others – and often the company itself—have interests in seeing the benefits being made available only narrowly.
These more theoretical questions – that is, how broadly should the benefits be made available – often are not considered at the outset. Often the arrangements are made with an unconscious (or unexamined) bias, such as for example that it is always better to have indemnification and insurance broadly available. It is perhaps an inquiry for another day, but these questions often are not fully examined.
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