Muthu Narayanan v. Sutherland Global Holdings ( 2016 )

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
)
MUTHU NARAYANAN, )
)
Plaintiff, )
)
v. ) C.A. No. 11757-VCMR
)
SUTHERLAND GLOBAL HOLDINGS )
INC., a Delaware corporation, )
)
Defendant. )
MEMORANDUM OPINION
Date Submitted: March 8, 2016
Date Decided: July 5, 2016
Garrett B. Moritz, Nicholas D. Mozal and Benjamin Z. Grossberg, ROSS
ARONSTAM & MORITZ LLP, Wilmington, Delaware; Attorneys for Plaintiff
Muthu Narayanan.
Daniel A. Dreisbach and J. Scott Pritchard, RICHARDS, LAYTON & FINGER,
P.A., Wilmington, Delaware; Joseph B. Schmit, PHILLIPS LYTLE LLP, New
York, New York; Attorneys for Defendant Sutherland Global Holdings, Inc.
MONTGOMERY-REEVES, Vice Chancellor.
This post-trial opinion grants a plaintiff-director’s demand for the
advancement of legal fees and expenses incurred defending against criminal
proceedings in India and civil proceedings in the United States. The plaintiff
served as a director and officer of the defendant-company’s India subsidiary for
many years, but this dispute arises from his service as a director of two additional
entities, one owned by the subsidiary and the other owned by the company’s
chairman, chief executive officer, and controlling stockholder. These additional
entities were formed as vehicles for acquiring and developing land in India.
Because of India’s property laws and real estate market conditions, the controlling
stockholder retained the services of two land aggregators to facilitate the land
development projects. The plaintiff-director oversaw the advancement of millions
of dollars to the aggregators for the purpose of acquiring contiguous land on behalf
of each entity. But the land development projects did not go as planned. After one
of those aggregators was imprisoned on conspiracy charges, the controlling
stockholder intervened and initiated an investigation.
Two years later, the plaintiff-director sought to retire and exercise certain
stock options, but the controlling stockholder refused those requests because the
defendant-company had not recovered the money it had advanced to the land
aggregators. After efforts to convince the defendant-company to pay proved
fruitless, the plaintiff-director sued the defendant-company in the United States
1
District Court for the Western District of New York. The defendant-company
raised the affirmative defense that the plaintiff-director’s breaches of his fiduciary
duties regarding the land transactions led to damages purportedly in excess of the
amount the plaintiff-director was seeking and counterclaimed that the plaintiff-
director never provided his full cooperation to collect the missing funds.
Thereafter, the plaintiff-director sought advancement to fund his response to the
set-off defense and counterclaim; the defendant-company refused. The plaintiff-
director later commenced this action.
After post-trial briefing, three issues remain. First, the parties dispute
whether two sources of indemnification, the defendant-company’s bylaws and an
indemnification agreement, must be read together or separately. Second, the
parties dispute whether the plaintiff-director served the entity owned by the
controller at the defendant-company’s request or for his own personal benefit.
Third, the parties dispute whether the Court should delay granting the plaintiff-
director’s fee requests, fees-on-fees, and pre-judgment interest claims until after
the Court determines the defendant-company is liable for those fees. For the
reasons that follow, the Court decides each issue in the plaintiff-director’s favor
and awards him the fees and expenses, fees-on-fees, and pre-judgment interest he
seeks.
2
I. BACKGROUND AND PROCEDURAL HISTORY1
The Court held a one-day trial on February 10, 2016. The parties submitted
a list of more than 200 joint exhibits, which were admitted into evidence by joint
pre-trial stipulation except as noted therein. Three fact witnesses testified at trial.
The pre-trial and post-trial briefing totaled 186 pages.
Except where noted, the following facts are undisputed. To the extent
certain facts are at issue, however, they are addressed specifically in the Analysis.2
Also, to the extent any of the following background facts are relevant to the merits
of the parties’ underlying disputes, they are not binding.
A. Facts
1. Parties and relevant non-parties
Plaintiff Muthu Narayanan is a chartered accountant and fellow member of
the Institute of Chartered Accountants of India, which is similar to a certified
public accountant (“CPA”) in the United States. Narayanan graduated from the
University of Madras with a degree in commerce and completed his chartered
accountancy course in 1979. For many years, Narayanan practiced with a firm that
provided accounting, taxation, auditing, and consultancy services. The Lalah
1
Citations to the testimony presented at trial are in the form “Tr. # (X)” with “X”
representing the surname of the speaker, if not clear from the text. Exhibits are
cited as “JX #.”
2
See infra Part III.
3
Spices company was one of the firm’s leading clients, and Narayanan came to
know the family that owned Lalah Spices well during that time.
Non-party Dilip Vellodi is the controlling stockholder, Chairman, and Chief
Executive Officer (“CEO”) of Defendant Sutherland Global Holdings, Inc.
(“Sutherland” or the “Company”). Sutherland helps clients in the United States to
acquire and retain customers in the telecommunications and technology sectors.
Narayanan met Vellodi in 1986 through his relationship with the Lalah Spices
family.3
Non-party D. Muthunarayanan & Co. (“DMNC”) is a firm Narayanan
started under his own name in 1994. In 1999 or 2000, both Vellodi and his wife
requested Narayanan’s consulting services in starting Sutherland’s operations in
India. Narayanan retired as a partner in DMNC in 20074 because he was devoting
most of his time to Sutherland and sensed that his partners were not pleased.5
Despite retiring, Narayanan allowed DMNC to continue using his name and
promoting itself with his credentials.6
3
Tr. 7 (Narayanan).
4
Compare JX 209 (reflecting a partnership interest as of January 1, 2007), with JX
210 (reflecting no partnership interest as of January 1, 2008).
5
Tr. 11 (Narayanan).
6
Id; see also JX 134.
4
Sutherland Global Services Private Limited is Sutherland’s India subsidiary
(“India Operating Sub”). Around 2004, Narayanan became an employee and
joined the boards of Sutherland and India Operating Sub at the request of
Sutherland’s then-Chief Financial Officer (“CFO”), some of Sutherland’s new
private equity investors, and Vellodi. When Narayanan became involved with
India Operating Sub, it employed five people, which Narayanan increased to about
14,000 by the time he retired in 2014. At all times relevant to this action, K.S.
Kumar was India Operating Sub’s Executive Vice President and Head of Global
Operations.
K.R.V. Properties Private Limited (“KRV”) and Sutherland Development
Company Private Limited (“SDC”) are entities formed to develop real estate (the
“KRV” and “SDC Land Development Projects,” respectively). Kamalesh
Kumarseth (“Kamalesh”) and S. Venkataramanan (“Ramanan”) are two land
aggregators Vellodi retained to pursue the KRV and SDC Land Development
Projects.7 In addition, Kamalesh is Vellodi’s brother-in-law, and Ramanan is
Kamalesh’s business partner.
7
See Tr. 17-18 (Narayanan) (“Q. And how was Ramanan selected as one of the land
aggregators? A. Because Dilip, who selected them, Kamalesh Kumar—Kumar
Kamalesh is the brother-in-law of Dilip. That is wife’s brother. And Ramanan is
the partner of Kamalesh. Dilip brought them to the table to help aggregating land
for K.R.V.”).
5
Mike Russo, who has a Bachelor of Science in accounting from Rochester
Institute of Technology and is a CPA in the State of New York, has long been
familiar with Sutherland’s affairs. Sutherland and Vellodi are both clients of
Russo’s firm, Freed Maxick CPAs, P.C. (“Freed Maxick”). Russo also works as
Sutherland’s legal coordinator.
S. Gopinath (“Gopi”) is Narayanan’s personal assistant.
2. KRV and SDC Land Development Projects
As a director of Sutherland, Narayanan became involved in the KRV and
SDC Land Development Projects at Vellodi’s request or on behalf of Sutherland.8
In 2006, Vellodi hired DMNC to form KRV and asked Narayanan to serve as a
director of the entity.9 To comply with India law, which requires corporations to
have at least two stockholders, Narayanan took shares that later amounted to about
0.1% of KRV; Vellodi owns the remaining 99.9%.10 Narayanan neither was paid
8
Tr. 13 (Narayanan) (“I was requested to be a director and form [KRV].”); Tr. 21
(“Q. . . . [D]id there come a time when Mr. Vellodi asked you to acquire land for a
Sutherland Global subsidiary? A. Correct.”).
9
Id. at 12-13. Sutherland does not contest seriously whether Narayanan served as a
director of KRV at Vellodi’s request. Instead, it argues that Narayanan’s activities
relating to KRV were outside business interests unrelated to his service as a
director of Sutherland. In any event, Narayanan’s motivation to serve KRV—both
as a director and otherwise—is a central issue in this case and is discussed in
greater detail below.
10
Id. at 13 (“Dilip had injected a lot of money, and he has a lot of shares from time
to time. And that’s how he ends up owning 99.9%. And that 5,000 shares that I
owned is now .1 percent. There’s no longer 50/50 as it shows [in JX 1].”).
6
by KRV nor received distributions from the entity but served the entity solely at
Vellodi’s request.11 Vellodi also retained Kamalesh and Ramanan to act as land
aggregators for the KRV and SDC Land Development Projects. Kamalesh,
Ramanan, and Vellodi engaged in KRV’s business together, and Vellodi “was very
much involved [in] the nitty-gritty level.”12 By 2010, KRV had purchased a
majority of the land sought. Of the nineteen-and-a-half acres acquired, nearly
fourteen were contiguous, which Narayanan described as “successful.”13
In June 2009, Kumar proposed acquiring and developing land for India
Operating Sub’s business campus in the Perumbakkam region of India. At
Vellodi’s instruction, India Operating Sub created SDC to acquire land and asked
Narayanan to be a director of this entity. The local government had allotted
Sutherland certain lands on a ninety-year leasehold basis for Sutherland’s campus,
but Vellodi decided it was better to own the land on a freehold basis without the
lease restriction.14 Vellodi directed Narayanan to continue to use Ramanan as a
land aggregator.15 On March 11, 2010, SDC authorized Narayanan to negotiate the
11
Id. at 14-15.
12
Id. at 19-20 (Narayanan); JX 7.
13
Tr. 20.
14
Id. at 22 (Narayanan).
15
Id. at 24 (Narayanan).
7
purchase of lands on its behalf.16
The land registration process proceeded smoothly until a new registrar in the
area doubled a government-levied stamp duty from 9% to 18% on the theory that
the aggregators’ participation as KRV’s and SDC’s intermediaries made the land
aggregation two transactions. An attorney, Udayakumar, recommended appealing
to the Inspector General of Registration, which the attorney advised would take
approximately two months.17 The appeal ultimately took four months, during
which time SDC suspended registration of lands to avoid incurring unnecessary
stamp duty. During the delay in registration, the price of land in the region
increased, which harmed SDC’s efforts in registering certain lands as owners
refused to proceed with transactions at prices to which they already had agreed.18
16
Id. at 28 (Narayanan); JX 18.
17
Id. at 31-32 (Narayanan).
18
Id. at 43-45 (Narayanan). To protect SDC, Narayanan instructed the financial
controller and finance team to account for the advances for which lands were not
registered within three to four weeks and, at the end of each month, aggregate and
secure those advances by taking promissory notes and undated checks from
Ramanan. Id. at 32-33. The promissory notes were valid for three years unless
renewed, and if the checks, once dated, were dishonored, a criminal action could
be instituted against Ramanan under the Indian Negotiable Instruments Act. Id. at
33 (Narayanan). When Narayanan left Sutherland, all of the promissory notes
were valid. Id. at 34.
8
3. Freed Maxick’s internal investigation
In July 2013, the parties realized that the SDC Land Acquisition Project was
not going as planned when they learned that Ramanan was imprisoned for work
done in a similar capacity. This raised red flags at Sutherland,19 and Sutherland
engaged Russo and Freed Maxick to investigate and report on its findings.20
Sutherland and Freed Maxick memorialized this engagement in a letter dated
August 20, 2013 (the “Engagement Letter”).21
Russo traveled to India to investigate Ramanan’s dealings with SDC. When
he spoke with Narayanan, however, Russo learned that Ramanan had been
aggregating land for SDC and KRV. Russo began investigating KRV while his
team, which arrived some time later, investigated SDC. The team detailed their
findings in separate letters to Vellodi dated September 12, 2013 (the “KRV
Report” and the “SDC Report”).22 Narayanan and Gopi provided information to
Russo regarding KRV.23 Russo spoke with Narayanan, Vellodi, and SDC’s
19
Id. at 177 (Russo).
20
Id. at 176-77 (Russo); JX 310.
21
JX 310.
22
JX 45 (KRV Report); JX 41 (SDC Report).
23
Tr. 185 (Russo).
9
financial controller, Prasad, regarding SDC.24 Although Russo thought Narayanan
was helpful in providing information, he reached conclusions independently that
differed from Narayanan’s statements. In Russo’s opinion, Narayanan’s “logic
didn’t seem to hold itself together,” and his “story just wasn’t overly credible.”25
Nonetheless, Sutherland chose not to enforce the undated checks and promissory
notes against Ramanan or to initiate criminal prosecution.26 Instead, Sutherland
purportedly relied on Narayanan’s representations that doing so would hurt the
chances of getting Ramanan to either deliver the land or return the advances. 27 On
November 13, 2013, Vellodi, Kumar, and Narayanan signed a memorandum
relating to the land issues that authorized Kumar “to deal with the matter” related
to Ramanan and the advances made on the land.28 These efforts apparently
continued, but none of the parties were able to recover the advances or the land.
4. New York Action and India Criminal Proceedings
By 2014, Narayanan was sixty-two years old and had worked at Sutherland
for over fifteen years. Narayanan communicated his desire to retire to Vellodi,
24
Id. at 196, 198-99.
25
Id. at 186.
26
Id. at 189 (Russo).
27
Id. at 188 (Russo).
28
JX 55.
10
who requested that Narayanan stay on until a pending, unrelated transaction closed
that fall.29 In September 2014, Sutherland allowed its stock option holders to
exercise their options on a net basis with the requirement that they sell back to
Sutherland 30% of the shares received.30 In October, Narayanan requested the
option to sell back to Sutherland 100% of the shares he would receive, which
Sutherland purportedly accepted.31 By the end of that month, the pending,
unrelated transaction had closed. Narayanan retired shortly thereafter,32 but he was
not paid for his shares.
Narayanan spoke with Russo about getting paid, but learned that Vellodi
was conditioning payment on completion of the SDC and KRV Land Development
Projects.33 A short time later, Vellodi contacted Narayanan to find out why
Narayanan was not coming into the office. Narayanan explained that he had
retired and wanted to be paid for his shares, but Vellodi both insisted that
29
Tr. 59 (Narayanan).
30
Id. at 60 (Narayanan) (explaining that “the stock option holders were given an
option to exercise on a net basis and any cash 30 percent”); see also JX 109, Ex. B
(“New York Action Complaint”) ¶4(b) (alleging Narayanan was required to “agree
to sell 30% of the Net Settlement Shares received by [Narayanan] via his Net
Exercise back to [Sutherland]”).
31
Tr. 60.
32
JX 76 (“Sutherland acknowledges that your employment with the Company
ceased effective October 23, 2014 . . . .”).
33
Tr. 61.
11
Narayanan continue working for Sutherland and conditioned Narayanan’s receipt
of payment for his shares on completion of the land transactions.34 According to
Narayanan, Vellodi then accused him of stealing money from the company and
threatened that if Narayanan continued seeking payment, he and his family would
suffer.35 Narayanan continued to pursue payment for his shares by contacting
Russo’s firm, Vellodi, and the Board. No one responded.36 In February 2015,
Narayanan decided to take legal action.
On March 25, 2015, Narayanan filed an action in the United States District
Court for the Western District of New York (the “New York Action”).37 The
complaint in the New York Action included claims for breach of contract and
unjust enrichment arising from two agreements and sought nearly $2 million in
damages. Sutherland filed its answer, defenses, counterclaims and jury demand on
June 15, 2015.38 As a defense, Sutherland alleged that Narayanan breached
fiduciary duties to Sutherland in connection with the land transactions and, as a
34
Id. at 62-63.
35
Id. at 63 (Narayanan) (“Then [Vellodi] shouted and said, ‘Hey, if you continue to
do this, you and your family will suffer.’”).
36
Id. at 64.
37
New York Action Complaint.
38
JX 92.
12
result, owes Sutherland more money than Sutherland owes him for his shares.39
Additionally, Sutherland alleged as a counterclaim that Narayanan never provided
his full cooperation in good faith to collect missing funds that he improperly had
exchanged for unenforceable promissory notes.40
On August 1, 2015, Vellodi instructed Kumar to file on behalf of KRV a
criminal complaint against Narayanan in Chennai, India, for allegedly breaching
his duties to KRV (the “KRV Criminal Proceedings”).41 That same day, the
commissioner of police registered the first information report against Narayanan
and sought his arrest.42 Narayanan was denied anticipatory bail and was
imprisoned for about twenty days.43 Then, on August 12, 2015, Kiran Verghese
Thomas, again authorized by Vellodi, filed a similar criminal complaint against
Narayanan on behalf of SDC (the “SDC Criminal Proceedings” and, together with
the KRV Criminal Proceedings, the “India Criminal Proceedings”).44 Shortly
thereafter, however, Narayanan won bail as to the SDC and KRV complaints on
39
Tr. 67; JX 92.
40
Tr. 70; JX 92.
41
Tr. 57-58 (Narayanan).
42
Id. at 72-73 (Narayanan); JX 98.
43
Tr. 73.
44
Id. at 76-77 (Narayanan); JX 103.
13
September 28, 201545 and September 30, 2015,46 respectively. Both judges who
granted Narayanan bail reasoned generally that there was no material evidence
linking Narayanan to the alleged criminal activities.47
B. Delaware Action
Currently, Narayanan is subject to the India Criminal Proceedings and is
defending against Sutherland’s set-off defense and counterclaim in the New York
Action (together, the “Underlying Proceedings”). The parties’ substantive
arguments in the Underlying Proceedings, however, are not at issue here. Instead,
this action (the “Delaware Action”) relates to whether and to what extent
Narayanan has the right to demand that Sutherland advance his legal fees and
expenses to defend himself in the Underlying Proceedings.48
Three instruments bear on Narayanan’s disputed right to advancement.
First, Sutherland’s certificate of incorporation authorizes Sutherland, to the fullest
extent permitted by applicable law, “to provide indemnification of (and
advancement of expenses to) [Narayanan] . . . through bylaw provisions,
agreements . . . , vote of stockholders or disinterested directors or otherwise, in
45
Tr. 79; JX 104.
46
Tr. 73-74; JX 105.
47
Tr. 74; JX 104-05.
48
Narayanan does not seek advancement for fees relating to the pursuit of his claims
in the New York Action. See infra notes 98-102 and accompanying text.
14
excess of the indemnification and advancement otherwise permitted by Section
145” of the Delaware General Corporation Law (“DGCL”), subject to certain
limitations created by the DGCL or other state laws, “with respect to actions for
breach of duty to a company, its stockholders, and others.”49 Sutherland expressly
provided such expanded rights by adopting bylaws and entering into an agreement
with Narayanan to provide mandatory advancement.
Second, Sutherland’s bylaws, effective March 5, 2013 (the “Bylaws”),
include the following relevant provisions:
Section 1. RIGHT TO INDEMNIFICATION OF
DIRECTORS AND OFFICERS. The Corporation shall
indemnify and hold harmless, to the fullest extent
permitted by applicable law as it presently exists or may
hereafter be amended, any person (a “Covered Person”)
who was or is made or is threatened to be made a party or
is otherwise involved in any action, suit or proceeding,
whether civil, criminal, administrative or investigative (a
“proceeding”), by reason of the fact that such person, or a
person for whom such person is the legal representative,
is or was a director or officer of the Corporation or, while
a director or officer of the Corporation, is or was serving
at the request of the Corporation as a director, officer,
employee or agent of another corporation or of a
partnership, joint venture, trust, enterprise or nonprofit
entity, including service with respect to employee benefit
plans, against all liability and loss suffered and expenses
(including attorneys’ fees) reasonably incurred by such
Covered Person in such proceeding. Notwithstanding the
preceding sentence, except as otherwise provided in
49
JX 29 (“Certificate”) Article NINTH.2.
15
Section 3 of Article VII of these Bylaws, the Corporation
shall be required to indemnify a Covered Person in
connection with a proceeding (or part thereof)
commenced by such Covered Person only if the
commencement of such proceeding (or part thereof) by
the Covered Person was authorized in advance by the
Board of Directors.
Section 2. PREPAYMENT OF EXPENSES OF
DIRECTORS AND OFFICERS. The Corporation shall
pay the expenses (including attorneys’ fees) incurred by a
Covered Person in defending any proceeding in advance
of its final disposition, provided, however, that, to the
extent required by law, such payment of expenses in
advance of the final disposition of the proceeding shall be
made only upon receipt of an undertaking by the Covered
Person to repay all amounts advanced if it should be
ultimately determined that the Covered Person is not
entitled to be indemnified under this Article VII or
otherwise.
Section 3. CLAIMS BY DIRECTORS AND
OFFICERS. If a claim for indemnification or
advancement of expenses under this Article VII is not
paid in full within 30 days after a written claim therefor
by the Covered Person has been received by the
Corporation, the Covered Person may file suit to recover
the unpaid amount of such claim and, if successful in
whole or in part, shall be entitled to be paid the expense
of prosecuting such claim. In any such action the
Corporation shall have the burden of proving that the
Covered Person is not entitled to the requested
indemnification or advancement of expenses under
applicable law.
....
Section 6. NON-EXCLUSIVITY OF RIGHTS. The
rights conferred on any person by this Article VII shall
not be exclusive of any other rights which such person
16
may have or hereafter acquire under any statute,
provision of the Certificate of Incorporation, these
Bylaws, agreement, vote of stockholders or disinterested
directors or otherwise.50
Third, “to attract and retain the involvement of highly qualified persons,
such as [Narayanan], to serve and be associated with the Company,” Sutherland
also entered into an indemnification agreement with Narayanan, effective March 5,
2013 (the “Indemnification Agreement”).51 The Indemnification Agreement
includes the following relevant provisions:
2. Indemnification.
(a) Indemnification of Expenses. Subject to the
provisions of Section 2(b) below, the Company shall
indemnify, exonerate or hold harmless [Narayanan] for
Expenses to the fullest extent permitted by law if
[Narayanan] was or 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, any Claim (whether by
reason of or arising in part out of a Covered Event),
including all interest, assessments and other charges
incurred in connection with or in respect of such
Expenses.52
50
JX 31 (“Bylaws”) art. VII §§ 1-3, 6.
51
JX 30 (“Indemnification Agreement”), Recital D.
52
Indemnification Agreement § 2. “Claim” means,
with respect to a Covered Event (as defined below) any
threatened, asserted, pending or completed action, suit,
proceeding or alternative dispute resolution mechanism, or
any hearing, inquiry or investigation that [Narayanan] in good
faith believes might lead to the institution of any such action,
17
3. Expense Advances.
(a) Obligation to Make Expense Advances. The
Company shall make Expense Advances to [Narayanan]
upon receipt of a written undertaking by or on behalf of
[Narayanan] to repay such amounts if it shall ultimately
be determined that [Narayanan] is not entitled to be
indemnified, exonerated or held harmless therefor by the
Company.
(b) Form of Undertaking. Any written undertaking by
[Narayanan] to repay any Expense Advances hereunder
shall be unsecured and no interest shall be charged
thereon.53
suit, proceeding or alternative dispute resolution mechanism,
whether civil, criminal, administrative, investigative or other.
Indemnification Agreement § 1(b). Further, “Covered Event” means,
any event or occurrence related to the fact that [Narayanan] is
or was a director, officer, employee, agent or fiduciary of the
Company, or any subsidiary of the Company, direct or
indirect, or is or was serving at the request of the Company as
a director, officer, employee, agent or fiduciary of another
corporation, partnership, joint venture, trust or other
enterprise, or by reason of any action or inaction on the part
of [Narayanan] while serving in such capacity.
Indemnification Agreement § 1(d).
53
Indemnification Agreement § 3. “Expense Advance” means “a payment to
[Narayanan] for Expenses pursuant to Section 3 hereof, in advance of the
settlement of or final judgment in any action, suit, proceeding or alternative
dispute resolution mechanism, hearing, inquiry or investigation, which constitutes
a Claim.” Indemnification Agreement § 1(e).
18
4. Procedures for Indemnification and Expense
Advances.
....
(b) Notice/Cooperation by [Narayanan]. [Narayanan]
shall, as a condition precedent to [his] right to be
indemnified, exonerated or held harmless or [his] right to
receive Expense Advances under this Agreement, give
the Company notice in writing as soon as practicable of
any Claim made against [him] for which indemnification,
exoneration or hold harmless right will or could be
sought under this Agreement. Notice to the Company
shall be directed to the President and the Secretary of the
Company at the address shown on the signature page of
this Agreement . . . . In addition, [Narayanan] shall give
the Company such information and cooperation as it may
reasonably require and as shall be within [his] power.54
5. Additional Indemnification Rights; Nonexclusivity.
....
(b) Nonexclusivity. The indemnification, exoneration or
hold harmless rights and the payment of Expense
Advances provided by this Agreement shall be in
addition to any rights to which [Narayanan] may be
entitled under the Company’s Certificate of
Incorporation, its bylaws, any other agreement, any vote
of stockholders or disinterested directors, the DGCL, or
otherwise.55
Notably, Section 4(b) of the Indemnification Agreement (the “Cooperation
Provision”) does not appear in the Bylaws.
54
Indemnification Agreement § 4.
55
Indemnification Agreement § 5.
19
On October 19, 2015, Narayanan sought to perfect his advancement rights
by mailing to Sutherland his Notice of Claim and Demand for Indemnification and
Payment of Expense Advances (the “Initial Notice”).56 Narayanan described the
claims made against him in the Underlying Proceedings for which he requested
indemnification and advancement. Narayanan also attached an undertaking to
repay the advancement should it be determined later that he is not entitled to
indemnification. After Sutherland failed to pay advancement to Narayanan, he
filed a complaint on November 30, 2015 asserting two causes of action (the
“Complaint”). Count I seeks advancement for Narayanan’s fees and expenses,
along with pre-judgment interest, arising from Sutherland’s set-off defense and
counterclaim in the New York Action and the India Criminal Proceedings. Count
II seeks advancement for Narayanan’s fees and expenses arising from his pursuit
of this Delaware Action (“fees-on-fees”).
On December 14, 2015, Narayanan mailed to Sutherland his Supplemental
Notice of Claim and Demand for Indemnification and Payment of Expense
Advances reflecting fees and expenses incurred in commencing this action (the
“Supplemental Notice”).57 The Supplemental Notice mirrored the Initial Notice,
but added a demand for advancement with respect to this action. Sutherland never
56
Tr. 87; JX 109.
57
Tr. 88; JX 122.
20
responded to either demand.
On December 15, 2015, the Court granted a stipulated order governing the
case schedule. The parties submitted simultaneous opening and answering briefs
on January 26 and February 1, 2016, respectively, and the Court held a one-day
trial on February 10, 2016. Thereafter, the parties submitted post-trial briefs, and
post-trial oral arguments were held on March 8, 2016.
C. Contentions
Post-trial briefing revealed that the following three issues remain: (1)
whether the Bylaws and the Indemnification Agreement must be read
conjunctively or disjunctively; (2) whether Narayanan served KRV at the request
of Sutherland; and (3) whether the Court should delay deciding the reasonableness
of Narayanan’s fee requests to date, fees-on-fees, and pre-judgment interest claims
until after the Court resolves Sutherland’s liability for those fees. This opinion
concludes as follows: (1) the Bylaws are a separate and independent source of
indemnification and advancement rights that do not condition Narayanan’s receipt
of advancement on his “cooperation”; (2) Vellodi’s request that Narayanan serve
as a director of the KRV and SDC entities satisfies the advancement provisions,
and Sutherland is thereby liable to Narayanan for the advancement he seeks
(including fees-on-fees and pre-judgment interest) with respect to each of the
Underlying Proceedings; and (3) there is no reason to further delay vindicating
21
Narayanan’s right to advancement.
II. ANALYSIS
A. Legal Standard
Ordinarily, a plaintiff has the burden of proving each element of each of its
causes of action against each defendant by a preponderance of the evidence,58
where proof by a preponderance of the evidence means proof that something is
more likely than not.59 Here, however, the parties agree that, under either’s theory
of the case, the Bylaws require Sutherland to prove that Narayanan is not entitled
to advancement.60
B. The Bylaws and Indemnification Agreement Are Disjunctive
Sutherland argues that Narayanan is not entitled to advancement because he
failed to satisfy the condition precedent that he cooperate with Sutherland, which,
here, means that Narayanan failed to cooperate adequately with Freed Maxick’s
investigation and Sutherland’s attempts to recover funds advanced to Ramanan.
58
Revolution Retail Sys., LLC v. Sentinel Techs., Inc., 2015 WL 6611601, at *9 (Del.
Ch. Oct. 30, 2015); In re Genelux Corp., 2015 WL 6393840, at *19 (Del. Ch. Oct.
22, 2015).
59
Agilent Techs., Inc. v. Kirkland, 2010 WL 610725, at *13 (Del. Ch. Feb. 18, 2010)
(quoting Del. Express Shuttle, Inc. v. Older, 2002 WL 31458243, at *17 (Del. Ch.
Oct. 23, 2002)).
60
Bylaws art. VI § 3 (“In any such action the Corporation shall have the burden of
proving that [Narayanan] is not entitled to the requested indemnification or
advancement of expenses under applicable law.”).
22
Although Sutherland admits that the Cooperation Provision only appears in the
Indemnification Agreement, Sutherland argues that, because the parties entered
into the agreements contemporaneously and thereby intended the Bylaws and the
Indemnification Agreement to be read conjunctively, the Court should enforce the
Cooperation Provision as a condition precedent to Narayanan’s right to receive
advancement under either source. Sutherland further argues that the proper scope
of the Cooperation Provision is broad and that Narayanan failed to satisfy the
Cooperation Provision.61
Narayanan contends that the Court need not reach the factual issue, however,
because the Bylaws, which are a separate and independent source of advancement
rights, include no cooperation requirement. Next, Narayanan argues that, even if
the Court reads the Bylaws and the Indemnification Agreement conjunctively, the
Cooperation Provision cannot be read as broadly as Sutherland contends, since the
facts upon which Sutherland relies constitute the substance and merits of the
Underlying Proceedings and, as such, should not be decided here. In the
alternative, Narayanan maintains that, at every turn, he actually provided
Sutherland as much cooperation as was within his power and as Sutherland could
reasonably require. Although the evidence supports each of Narayanan’s three
61
Oral Arg. Tr. 33-34.
23
arguments, the Court reaches only whether the Bylaws and Indemnification
Agreement are disjunctive.
1. Controlling law
Section 145 of the DGCL governs indemnification and advancement.
Subject to certain limitations, a corporation has discretionary authority to provide
indemnification under subsections (a) and (b) and advancement under subsection
(e), but must provide indemnification in certain circumstances pursuant to
subsection (c). As relevant here, Section 145(f) makes clear that the
indemnification and advancement rights under the DGCL are not exclusive of any
additional indemnification and advancement rights a corporation chooses to
provide through a separate instrument. To that end, the first sentence of Section
145(f) (the “Non-Exclusivity Clause”) states, in relevant part:
The indemnification and advancement of expenses
provided by, or granted pursuant to, the other subsections
of this section shall not be deemed exclusive of any other
rights to which those seeking indemnification or
advancement of expenses may be entitled under any
bylaw, agreement, vote of stockholders or disinterested
directors or otherwise, both as to action in such person’s
official capacity and as to action in another capacity
while holding such office.62
62
8 Del. C. § 145(f) (emphasis added).
24
Vice Chancellor Laster reviewed Section 145’s legislative history recently in
Marino v. Patriot Rail Company.63 In short, during the three years before the
DGCL was overhauled in 1967, “no subject was more discussed among members
of the corporate bar than the subject of indemnification of officers and directors.”64
Although Section 145 was modernized at that time, the language of the Non-
Exclusivity Clause largely was unchanged from the pre-1967 version. “Both the
old and new indemnification statute declare that their provisions are not exclusive
of other rights under any ‘by-law, agreement, vote of stockholders or disinterested
directors or otherwise.’”65 The drafting committee said the power to indemnify
was “non-exclusive so that other rights to indemnification may still exist by
contract, by-law or charter within such limits of public policy as the courts may
establish.”66 “Thus, one may become entitled to indemnification outside the terms
of the statute by virtue of an express contract awarding indemnity, such as an
63
131 A.3d 325, 332-43 (Del. Ch. 2016).
64
S. Samuel Arsht & Walter K. Stapleton, Delaware’s New General Corporation
Law: Substantive Changes, 28 BUS. LAW. 75, 77-78 (1967).
65
ERNEST L. FOLK, III, THE DELAWARE GENERAL CORPORATION LAW: A
COMMENTARY AND ANALYSIS 101 (1972) (quoting 8 Del. C. § 145(f)).
66
Arsht & Stapleton, supra note 64.
25
agreement between a corporation and an executive to terminate employment.”67
“[T]o secure indemnity outside the specific statutory standards, ‘an independent
legal ground for such claim must be shown in every case.’”68
The Court applied these principles recently in Charney v. American Apparel,
Inc.69 There, the founder and former Chairman and CEO of American Apparel,
Inc. sought advancement for legal fees he incurred defending litigation that arose
after he ceased holding those positions.70 Chancellor Bouchard considered
whether the director’s advancement rights appeared in three instruments—a
standstill agreement, the company’s charter, and the director’s indemnification
agreement. When analyzing the indemnification agreement, the Chancellor
determined that, “separate from and in addition to the [c]harter . . . , the Company
agreed to indemnify and to advance certain of [the director’s] expenses under his
Indemnification Agreement, which is governed by Delaware law.”71 Thus, the
Court recognized that the company validly had exercised its authority under
Section 145(f) to grant the director multiple sources of separate and independent
67
FOLK, supra note 65 (citing Mooney v. Willys-Overland Motors, Inc., 204 F.2d
888, 899 (3d Cir. 1953)).
68
FOLK, supra note 65, at 102 (citing Mooney, 204 F.2d at 896).
69
2015 WL 5313769 (Del. Ch. Sept. 11, 2015).
70
Id. at *1.
71
Id. at *9 (citing 8 Del. C. § 145(f)).
26
advancement rights. In other words, Charney stands for the proposition that the
unavailability of advancement under one source of rights does not foreclose the
possibility of advancement under another. Sutherland not only failed to address
Charney in its brief, but also failed to distinguish Charney at argument on any
meaningful basis.
Sutherland relies exclusively on Levy v. Hayes Lemmerz International, Inc.72
to sustain its argument that construing the Bylaws and the Indemnification
Agreement separately is “plainly contradicted by our cases.”73 Sutherland’s
argument does not turn on the holding of Levy. Levy interpreted the operative
agreements in that case and rejected the company’s argument that it had a
contractually-mandated thirty-day period to consider a written demand for
indemnification, which the former directors breached by filing suit prematurely.74
Instead, Sutherland focuses on a footnote that states as follows:
In reaching this conclusion, however, the court rejects the
plaintiffs’ argument that the Old Hayes bylaws and the
indemnification agreements provide two entirely
independent sources of indemnification, and that
therefore any procedural requirements for
indemnification under the agreements are irrelevant to
indemnification under the bylaws. Not only does such a
72
2006 WL 985361, at *7 n.24 (Del. Ch. Apr. 5, 2006).
73
Def.’s Post-Trial Answering Br. 12-14 (citing Levy, 2006 WL 985361, at *7 n.24).
74
Levy, 2006 WL 985361, at *6-7.
27
construction of the two documents make nonsense of the
indemnification agreements, but it is plainly contradicted
by our cases. Most obviously, the Supreme Court was
confronted with a similar situation in Citadel Holding
Corp. v. Roven, 603 A.2d 818 (Del. 1992), where a
bylaw provided indemnitees with the full range of
indemnification rights available under Delaware law, and
the accompanying indemnification agreement contained
certain other rights. The court there assumed that the two
documents would be read together, and firmly rejected
the defendant’s position that the indemnification
agreement somehow left the advancement provision, at
issue in that case, entirely unchanged. The court sees no
reason to read the plainly conjunctive documents in this
case any differently than the Supreme Court construed
them in Citadel.75
First, the Levy Court’s rejection of one of the former directors’ other
arguments as “plainly contradicted by our cases” is dicta and not controlling.
Second, I interpret Citadel differently than Levy did. In Citadel, the
Supreme Court determined that, although the directors there were not entitled to
mandatory advancement under the DGCL or the company’s bylaws, the directors
were entitled to mandatory advancement under an indemnification agreement.76
The Supreme Court’s recognition of a contract that provides unique advancement
rights not provided elsewhere—like a statute, certificate, or bylaws—supports the
proposition that, in the absence of evidence to the contrary, contractual
75
Id. at *7 n.24.
76
Citadel, 603 A.2d at 823-24.
28
advancement rights are separate and independent from those found in other
sources. Accordingly, the Supreme Court’s conclusion in Citadel that the
director’s indemnification agreement provided broader rights than the company’s
bylaws suggests it read those instruments separately.
Third, at argument Sutherland appeared to rely on the rule that contracts
entered into by the same parties in one transaction or at the same time should be
construed together77 when it urged the Court to read the Bylaws and
77
See, e.g., Ashall Homes, Ltd. v. ROK Entm’t Gp., Inc., 992 A.2d 1239, 1250 n.56
(Del. Ch. 2010) (citing Crown Books Corp. v. Bookstop Inc., 1990 WL 26166, at
*1 (Del. Ch. Feb. 28, 1990) (“[I]n construing the legal obligations created by [a]
document, it is appropriate for the court to consider not only the language of that
document but also the language of contracts among the same parties executed or
amended as of the same date that deal with related matters.”); 17A C.J.S.
Contracts § 315 (1999); 11 WILLISTON ON CONTRACTS § 30:26 (4th ed. 1999)
(“Apart from the explicit incorporation by reference of one document into another,
the principle that all writings which are part of the same transaction are interpreted
together also finds application in the situation where incorporation by reference of
another document may be inferred from the context in which the documents in
question were executed. Thus, in the absence of anything to indicate a contrary
intention, instruments executed at the same time, by the same contracting parties,
for the same purpose, and in the course of the same transaction will be considered
and construed together as one contract or instrument, even though they do not in
terms refer to each other.”); RESTATEMENT (SECOND) OF CONTRACTS § 202(2)
(1981) (“A writing is interpreted as a whole, and all writings that are part of the
same transaction are interpreted together.”)). The revised edition of Corpus Juris
Secondum states, “[i]n the absence of anything to indicate a contrary intention,
writings executed at the same time and relating to the same transaction are
construed together as a single contract.” 17A C.J.S. Contracts § 401 (2011).
29
Indemnification Agreement together and “come to a natural result.”78
Conspicuously absent from Sutherland’s recitation, however, is the rule’s
qualifying condition, “in the absence of evidence to the contrary.”79 As discussed
below, the operative contractual provisions in this case present ample evidence to
the contrary. Thus, the rule is not applicable here.
2. Interpreting the Bylaws and Indemnification Agreement
Delaware follows an objective theory of contracts, “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.’”80 When a contract is clear
and unambiguous, Delaware courts interpret its terms according to their plain
meaning.81 A term in a contract that is reasonably susceptible to more than one
interpretation is ambiguous, but “[t]he parties’ steadfast disagreement over
interpretation will not, alone, render the contract ambiguous.”82 Neither will
78
Oral Arg. Tr. 38 (“We have two parties together, same rights, same day, same
subject matter. We should do everything we can to read them together and come
to a natural result.”).
79
See supra note 77.
80
Charney, 2015 WL 5313769, at *10 (citing Rhone-Poulenc Basic Chems. Co. v.
Am. Motorists Ins. Co., 616 A.2d 1192, 1196 (Del. 1992)).
81
Rhone-Poulenc, 616 A.2d at 1195.
82
See Osborn v. Kemp, 991 A.2d 1153, 1160 (Del. 2010) (citing Twin City Fire Ins.
Co. v. Del. Racing Ass’n, 840 A.2d 624, 628 (Del. 2003); Rhone-Poulenc, 616
A.2d at 1195).
30
“extrinsic, parol evidence . . . be used to manufacture an ambiguity in a contract
that facially has only one reasonable meaning.”83 Because the relevant provisions
here are unambiguous, extrinsic evidence is not considered.
Here, Sutherland’s Certificate authorized it to grant Narayanan the
advancement rights set forth in its Bylaws and the Indemnification Agreement.
Furthermore, the Bylaws and the Indemnification Agreement adopt language
substantially similar to the Non-Exclusivity Clause in Section 145 and declare that
those instruments are not exclusive of any other source of rights. Moreover,
Sutherland’s argument that nothing in the Bylaws precludes the parties from
negotiating the Indemnification Agreement misses the point. That the Bylaws do
not preclude negotiation of the Indemnification Agreement does nothing to counter
Narayanan’s argument, or the instruments’ plain language, that the two exist
separately and independently of each other.
Additionally, although the Bylaws and the Indemnification Agreement were
both effective as of March 5, 2013, the non-exclusivity provision in each manifests
the parties’ express intent for each instrument to provide rights and obligations
83
United Rentals, Inc. v. RAM Hldgs., Inc., 937 A.2d 810, 830 (Del. Ch. 2007)
(citing Eagle Indus., Inc. v. DeVilbiss Health Care, Inc., 702 A.2d 1228, 1232
(Del. 1997) (“If a contract is unambiguous, extrinsic evidence may not be used to
interpret the intent of the parties, to vary the terms of the contract or to create an
ambiguity.”)).
31
independent of the other.84 That Narayanan is a beneficiary of both instruments
does not negate the parties’ express intent that the Bylaws provide certain rights
and obligations to a group of individuals and the Indemnification Agreement
provide certain different or additional rights and obligations to a single individual.
Had the parties intended the instruments to operate conjunctively, they only needed
to replace the non-exclusivity provisions with language to that effect.
In sum, Sutherland has failed to prove by a preponderance of the evidence
that the Bylaws and the Indemnification Agreement are conjunctive. Instead,
under the circumstances present and for the reasons discussed above, the Court
holds that the Bylaws and Indemnification Agreement are separate and
independent sources of advancement rights. The Bylaws do not contain or
incorporate the Cooperation Provision Sutherland seeks to enforce, and Sutherland
fails to prove that the parties intended otherwise. Accordingly, the Court does not
reach the parties’ alternative arguments regarding cooperation. In addition,
84
Bylaws art. VII § 6 (“The rights conferred on any person by this Article VII shall
not be exclusive of any other rights which such person may have or hereafter
acquire under any statute, provision of the Certificate of Incorporation, these
Bylaws, agreement, vote of stockholders or disinterested directors or otherwise.”);
Indemnification Agreement § 5(b) (“The indemnification, exoneration or hold
harmless rights and the payment of Expense Advances provided by this
Agreement shall be in addition to any rights to which [Narayanan] may be entitled
under the Company’s Certificate of Incorporation, its bylaws, any other
agreement, any vote of stockholders or disinterested directors, the DGCL, or
otherwise.”).
32
Sutherland concedes that, to the extent the Court rules against Sutherland on
cooperation, it is obligated to advance Narayanan’s fees and expenses incurred in
defending Sutherland’s set-off defense and counterclaim in the New York Action
and the SDC Criminal Proceedings.85 This opinion rejects Sutherland’s
cooperation argument. Therefore, there is no dispute that Narayanan is entitled to
advancement generally with respect to the New York Action and the SDC
Criminal Proceedings.
C. Narayanan Served KRV at the Request of Sutherland
Sutherland contends that the Court should deny Narayanan advancement for
the KRV Criminal Proceedings. To this end, Sutherland argues, and spent a great
deal of time at trial trying to prove, that KRV is not a subsidiary or affiliate of
Sutherland and that Narayanan’s activities relating to KRV were motivated by his
own business interests. Thus, Sutherland reasons, Narayanan’s KRV-related
activities are outside the scope of his Sutherland-related advancement rights. Both
of these arguments fail.
85
Id. at 34 (“THE COURT: You do agree, though, . . . to the extent I ruled against
you on cooperation, then there wouldn’t be a dispute about whether or not Mr.
Narayanan is entitled to advancement for the defense of the counterclaims in the
New York action and the SDC proceedings? [COUNSEL]: That’s correct, Your
Honor.”).
33
As an initial matter, that KRV is not a subsidiary or affiliate of Sutherland is
irrelevant to whether Narayanan is entitled to advancement of fees and costs
related to the KRV Criminal Proceedings. The Bylaws obligate Sutherland to
advance Narayanan’s legal fees and expenses incurred “by reason of the fact that
[he], . . . while a director or officer of the Corporation, is or was serving at the
request of the Corporation as a director, officer, employee or agent of another
corporation or of a partnership, joint venture, trust, enterprise or nonprofit
entity . . . .”86 Thus, Narayanan argues correctly that the relevant inquiry under the
Bylaws is whether Narayanan, while a director or officer of Sutherland, served as a
director, officer, or employee of KRV at Sutherland’s request.
At trial, Narayanan testified repeatedly that he worked for and served as a
director of KRV because Vellodi, the Chairman, CEO, and controlling stockholder
of Sutherland, instructed him to do so.87 Narayanan also testified credibly that at
Sutherland, Vellodi’s requests were the equivalent of instructions from the
Company. It was not unusual for Narayanan or other Sutherland employees to
receive instructions for acting on behalf of Sutherland from Vellodi. For example,
Sutherland employees doing KRV work at Vellodi’s request and without
86
See Bylaws art. VII § 1; see also Indemnification Agreement § 1(b) (requiring the
same inquiry).
87
Tr. 12, 13, 14-15, 19-20, 23.
34
compensation from KRV included Susan DeCann, Sheela Solomon, Sujeet
Oomen, Kiran Verghese Thomas, and Vasudeva Rao.88
In the absence of testimony from Vellodi denying that he instructed
Narayanan to serve as a director of KRV,89 Sutherland attempts to prove that
Narayanan served as a director of KRV for personal reasons. Specifically,
Sutherland highlights Narayanan’s history and relationship with DMNC.
Ultimately, this evidence shows little more than the fact that such history and
relationship exist.90 Sutherland has failed to demonstrate that, during KRV’s
88
JX 8 (DeCann & Solomon), 61 (Oomen & Thomas), 65 (Thomas), 66 (Rao), 68
(Rao).
89
Although Sutherland cites and references Vellodi’s deposition transcript in its
post-trial brief (Def.’s Post-Trial Answering Br. 9 n.2), the parties’ Joint Pre-Trial
Stipulation and Order (“PTO”) provides that “[d]eposition testimony is admissible
to the extent permitted by the Delaware Uniform Rules of Evidence and the Court
of Chancery Rules.” PTO ¶ VII.1-2. Narayanan objects to Sutherland’s reliance
on Vellodi’s deposition transcript and argues that the transcript is hearsay under
D.R.E. 801(c) and is not subject to any exception. Def.’s Post-Trial Reply Br. 2-3
n.1. Sutherland did not attempt to explain Vellodi’s last minute absence from the
trial, despite the fact that he was on the witness list. Likewise, Sutherland fails to
respond to Narayanan’s hearsay objection. I agree that the referenced Vellodi
deposition is hearsay that is not subject to any exception. As such, I have not
considered it in this ruling.
90
Sutherland compiles the following evidence in its post-trial Answering Brief:
Narayanan founded DMNC in 1994 (Tr. 94; JX 134); Vellodi retained DMNC to
form KRV in 2006 (Tr. 120; JX 2); Narayanan and Vellodi used personal
addresses when forming KRV (Tr. 116-19; JX 1, 309); KRV’s registered address
is the same as DMNC’s (Tr. 126-28; JX 33); DMNC handled certain duties for
KRV (Tr. 169-70); DMNC was compensated for its KRV work (Tr. 123-25, 126-
29, 169-70; JX 33, 302); Narayanan remained a partner at DMNC through 2007
35
existence, Narayanan had more than a nominal interest in KRV, received salary or
distributions from DMNC during DMNC’s relationship with KRV or after his
retirement from DMNC, or received material compensation of any kind from any
relevant entity other than Sutherland.91
Nothing in the record calls into question or rebuts Narayanan’s testimony
that he served KRV at the request of Vellodi, and the Court finds Narayanan
competent and credible on this issue. Accordingly, the Court concludes that
Narayanan served KRV at the request of Vellodi. Vellodi, as Sutherland’s
Chairman, CEO, and controlling stockholder, has both actual and apparent
authority to direct employees and bind the Company. And he did just that. Based
on the evidence presented at trial, the Court concludes that, under the
circumstances, Vellodi’s instruction satisfies the Bylaws’ requirement that
(Tr. 97-98); Narayanan was a signatory on KRV accounts (Tr. 130); there was no
formal announcement of Narayanan’s retirement from DMNC in 2007 (Tr. 107-
08); following his supposed retirement from DMNC, Narayanan continued
receiving and sending emails from his DMNC email account (Tr. 111, 115, 116;
JX 307, 308); Narayanan continues a personal consulting business despite retiring
from DMNC because he was too busy with Sutherland (Tr. 104-05); at one point
DMNC relocated across the street from Narayanan’s home (Tr. 109, 161); and
DMNC’s website lists Narayanan as a founder and head of business setup services
and advisory services (Tr. 105-06; JX 134). See Def.’s Post-Trial Answering Br.
20-22.
91
Tr. 166 (Narayanan) (“Q. Okay. And apart from your Sutherland salary, were
you paid anything for the work that you did on the K.R.V. land transactions? A.
No.”).
36
Sutherland request Narayanan serve as a director of another company.
Therefore, the Bylaws entitle Narayanan to recover from Sutherland the fees
and expenses he incurred in responding to Sutherland’s set-off defense and
counterclaim in the New York Action and both India Criminal Proceedings.
D. Sutherland Must Advance the Fees Narayanan Presented at Trial
“The Court of Chancery may summarily determine a corporation’s
obligation to advance expenses (including attorneys’ fees).”92 In advancement
proceedings, the Court of Chancery often makes legal and factual determinations
concerning the scope of advancement obligations, but “the function of a § 145(k)
advancement case is not to inject this court as a monthly monitor of the precision
and integrity of advancement requests.”93 With respect to objections to specific fee
requests, this Court has followed Fasciana v. Electric Data Systems Corporation,
where then-Vice Chancellor Strine observed, “[u]nless some gross problem arises,
a balance of fairness and efficiency concerns would seem to counsel deferring
fights about details until a final indemnification proceeding . . . .”94
92
8 Del. C. § 145(k).
93
Fasciana v. Elec. Data Sys. Corp., 829 A.2d 160, 177 (Del. Ch. 2003).
94
Id. See also Danenberg v. Fitricks, Inc., 58 A.3d 991, 998 (Del. Ch. 2012); Duthie
v. CorSolutions Med., Inc., 2008 WL 4173850, at *2 (Del. Ch. Sept. 10, 2008)
(“Advancement is not the proper stage for a detailed analytical review of the fees .
. . . In the absence of clear abuse, the fees should be advanced.”).
37
As explained above, Sutherland is obligated to advance Narayanan’s legal
fees in the Underlying Proceedings. Narayanan presented evidence at trial
supporting the fees and expenses he requested until then, including an allocation of
fees between covered and uncovered claims in the New York Action. Sutherland
had every opportunity to submit rebutting evidence, but chose not to. Instead,
Sutherland urges the Court not to award Narayanan the fees and expenses he
requested at trial at this stage. As a matter of judicial efficiency, and because
advancement is meant to be a summary proceeding, the Court concludes there is no
reason to further delay vindicating Narayanan’s right to advancement.95
With respect to the India Criminal Proceedings, Narayanan presented
evidence at trial on the expenses he incurred and illustrated aspects of India’s legal
system that differ from ours. In addition, having conceded that Sutherland is not
obligated to indemnify or advance Narayanan’s legal fees relating to his
95
Two post-trial opinions support this approach. In Barrett, then-Vice Chancellor
Strine refused to permit a corporation to delay litigation further with “nit-picking”
over the costs directors had incurred to vindicate a clear legal right. 951 A.2d at
747 n.40. Although Barrett is distinguishable on factual grounds, it is an example
of the Court declining to postpone awarding fees requested at trial. In Blankenship
v. Alpha Appalachia Holdings, Inc., Chancellor Bouchard determined a
company’s obligation to pay advancement and awarded requested expenses to the
plaintiff in the same post-trial opinion, even though “[t]he reasonableness of the
invoices [the plaintiff] submitted for payment was not the subject of any inquiry at
trial . . . .” 2015 WL 3408255, at *27 (Del. Ch. May 28, 2015). Citing Fasciana,
the Chancellor observed that the defendants had no substantive objection that the
withheld fees were unreasonable and raised no “gross problem” or legitimate
reason requiring a “playground monitor” at that stage. Id. at 28.
38
affirmative claims in the New York Action, Narayanan presented evidence on the
process his New York counsel utilized to segregate unrecoverable fees from those
to which Narayanan legally is entitled.
Narayanan requests Sutherland advance 3,090,000 rupees—275,000 for fees
and expenses incurred in the SDC Criminal Proceeding and 2,815,000 for fees and
expenses incurred in the KRV Criminal Proceeding.96 Acknowledging that he had
hired several lawyers, Narayanan explained at trial that India has a solicitors and
barristers system similar to England and that it is not unusual in India to hire as
many lawyers as he did to handle proceedings in multiple courts. 97 Sutherland did
not present any evidence on this issue. Nothing in the record calls into question or
rebuts Narayanan’s testimony with respect to these fee requests, and the Court
finds Narayanan competent and credible on this issue. Thus, Sutherland shall
advance the 3,090,000 rupees Narayanan requested at trial.
Narayanan requests $115,688 for fees and expenses incurred in the New
York Action. John Cuti, one of Narayanan’s lawyers in the New York Action,
testified at trial that the fees and expenses incurred in defending that action through
96
Pl.’s Post-Trial Opening Br. 50; see also JX 116, 200, 202-05.
97
Tr. 80.
39
November 2015 are documented in a series of invoices.98 Because these invoices
include fees and expenses incurred in prosecuting affirmative claims for which
indemnification and advancement are not recoverable, Cuti utilized the following
process for segregating recoverable fees and expenses. First, Cuti reviewed the
invoices and allocated the individual entries based on whether the time was spent
either on the uncovered affirmative claims or the covered set-off defense and
counterclaim.99 Then, Cuti created two consolidated, color-coded itemizations of
the time entry-by-time entry allocations for both (1) the set-off defense and
counterclaim100 and (2) the efforts to force Sutherland to honor its indemnification
and advancement obligations, including New York counsel’s efforts related to this
action.101 Lastly, Cuti compiled the totals from those two itemizations into a chart
summarizing the breakdown, which reflects that Narayanan’s New York counsel
incurred $115,688 in fees in responding to Sutherland’s set-off defense and
98
Tr. 225-28 (Cuti); see also JX 93, 96, 101, 106, 110, 114. In December 2015, Cuti
also began separating his fees and expenses arising from this Delaware Action
from those related to the New York Action. See JX 124 (New York Action), JX
125 (Delaware Action).
99
Tr. 230. This included reviewing “e-mail correspondence and other documents to
help refresh [Cuti’s] recollection about how much time was spent on various
matters.” Tr. 229-30.
100
JX 118.
101
JX 119. As Cuti explained at trial, individual line items on the color-coded
itemizations found in JX 118 and 119 correspond and can be traced back to the
allocated time entries found in JX 211, 212, 113, and 124. Tr. 229-34.
40
counterclaim.102 Again, Sutherland neither presented evidence on this issue nor
submitted any substantive objection to the allocation procedure Cuti employed or
the fees Narayanan requested. Thus, Sutherland shall advance the $115,688
Narayanan requested at trial.
Narayanan also seeks the reasonable fees and expenses he incurred in
connection with this Delaware Action. Delaware law and the Bylaws mandate the
payment of fees-on-fees here.103 In particular, the Bylaws provide that, if
Narayanan is “successful in whole or in part” on “a claim for indemnification or
advancement of expenses,” he “shall be entitled to be paid the expense of
prosecuting [his] claim.”104 Narayanan has been “successful in whole” in
obtaining advancement of the fees and expenses he requested at trial. Accordingly,
the Bylaws entitle Narayanan to be paid the expense of prosecuting this Delaware
Action. Through February 10, 2016, Narayanan incurred legal fees and expenses
related to this action in the amount of $239,500.04 from his Delaware counsel and
102
Tr. 234-35; JX 117.
103
8 Del. C. § 145; see also Stifel Fin. Corp. v. Cochran, 809 A.2d 555, 561 (Del.
2002) (“We hold that indemnification for expenses incurred in successfully
prosecuting an indemnification suit are permissible under § 145(a), and therefore
‘authorized by law.’”); Barrett, 951 A.2d at 746 (noting “Supreme Court
jurisprudence mandating ‘fees on fees’ in advancement actions” and awarding
directors legal fees and costs associated with prosecuting action). Bylaws art. VII,
§ 3.
104
Bylaws art. VII § 3.
41
$60,348.00 from his out-of-state counsel.105 As before, Sutherland makes no
substantive objection to Narayanan’s request. Sutherland shall advance the
$299,848.04 that Narayanan requested at trial.
Next, “[a] party seeking advancement is entitled to interest from the date on
which the party ‘specified the amount of reimbursement demanded and produced
his written promise to pay.’”106 Narayanan’s request for pre-judgment interest is
unopposed. In Delaware, pre-judgment interest accrues at the legal rate set forth in
6 Del. C. § 2301(a) and is compounded quarterly.107 Narayanan submitted the
Initial Notice demanding advancement and providing an undertaking to Sutherland
on October 19, 2015 and the Supplemental Notice adding a demand for
advancement with respect to this action on December 14, 2015.108 Under the
Bylaws, Sutherland was required to pay these demands in full within thirty days of
receiving them.109 Thus, Narayanan is entitled to pre-judgment interest, accruing
105
See Aff. of John R. Cuti in Connection with Count II of the Verified Compl.; Aff.
of Garrett B. Moritz in Connection with Count II of the Verified Compl.; see also
JX 81, 109, 114, 122, 124, 125, 135.
106
Underbrink v. Warrior Energy Servs., Corp., 2008 WL 2262316, at *19 (Del. Ch.
May 30, 2008); see also O’Brien v. IAC/Interactive Corp., 2010 WL 3385798, at
*17 (Del. Ch. Aug. 27, 2010) (awarding pre-judgment interest), aff’d, 26 A.3d 174
(Del. 2011).
107
Underbrink, 2008 WL 2262316, at *19.
108
JX 109, 122.
109
Bylaws art. VII § 3.
42
at the statutory rate and compounded quarterly, beginning thirty days after
Sutherland received each of Narayanan’s demands on the amounts requested
therein.110
Finally, Narayanan requests that the Court enter an order providing for a
procedure for submission of further requests for advancement and the prompt
resolution of any disputes that arise regarding such requests.111 The Court
concludes that an order imposing the framework detailed by this Court in Fitracks
is appropriate for governing fee requests and objections going forward.112
III. CONCLUSION
For the foregoing reasons, the Court concludes that the Bylaws entitle
Narayanan to recover from Sutherland 275,000 rupees for fees and expenses
incurred in the SDC Criminal Proceedings; 2,815,000 rupees for fees and expenses
incurred in the KRV Criminal Proceedings; $115,688.00 for fees and expenses
incurred through December 31, 2015 in connection with defending Sutherland’s
second affirmative defense and counterclaim in the New York Action; and
$299,848.04 for fees and expenses incurred in this Delaware Action through the
110
That is, the interest due on each demand shall be calculated separately using the
relevant dates and amounts requested.
111
Pl.’s Post-Trial Reply Br. 50.
112
Fitracks, 58 A.3d at 1003-04.
43
February 10, 2016 trial. Sutherland shall pay these fees and expenses, together
with pre-judgment interest, accruing at the statutory rate and compounded
quarterly, beginning thirty days after Sutherland received each of Narayanan’s
demands on the amounts requested therein, no later than ten days after the filing of
this opinion.
The parties shall submit a stipulated form of order within ten days of this
opinion imposing the framework detailed by this Court in Danenberg v. Fitracks,
Inc.,113 which order shall govern the submission of further requests for
advancement and the prompt resolution of any disputes that arise regarding such
requests.
IT IS SO ORDERED.
113
58 A.3d 991, 1003-04 (Del. Ch. 2012).
44