Marlene Krauss, M.D. v. 180 Life Sciences Corp.

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
MARLENE KRAUSS, M.D., )
)
Plaintiff, )
)
v. ) C.A. No. 2021-0714-LWW
)
180 LIFE SCIENCES CORP., )
)
Defendant. )
MEMORANDUM OPINION
Date Submitted: December 7, 2021
Date Decided: March 7, 2022
Kenneth J. Nachbar, S. Mark Hurd, and Sara Toscano, MORRIS, NICHOLS,
ARSHT & TUNNELL LLP, Wilmington, Delaware; Aaron Miner, ARNOLD &
PORTER, New York, New York; Counsel for Plaintiff Marlene Krauss, M.D.
Matthew F. Davis, Aaron R. Sims, and Callan R. Jackson, POTTER ANDERSON
& CORROON LLP, Wilmington, Delaware; Jeffrey W. Shields, SHIELDS LAW
OFFICES, Irvine, California; Counsel for Defendant 180 Life Sciences Corp.
WILL, Vice Chancellor
A former director and officer of a Delaware corporation seeks advancement
pursuant to provisions in the company’s charter and bylaws. She is pursuing
advancement of expenses incurred in responding to subpoenas from the Securities
and Exchange Commission, in defending herself against third-party claims in a New
York state action, and in connection with litigation in this court. The company
contests her entitlement to advancement, asserting that she was not made a party to
those proceedings by reason of the fact that she was a fiduciary.
The plaintiff has moved for partial summary judgment on her entitlement to
advancement, including an award of fees-on-fees. This decision grants that motion
in part.
I. FACTUAL BACKGROUND
The following facts are drawn from the undisputed allegations of the Verified
Amended and Supplemental Complaint for Advancement (the “Complaint”) and
from certain documentary exhibits.1
1
Dkt. 7. Citations to “Pl.’s Opening Br. Ex. __” refer to exhibits to the Transmittal
Declaration of Sara Toscano in Support of the Opening Brief in Support of Plaintiff’s
Motion for Partial Summary Judgment (Dkt. 37). Citations in the form of “Def.’s
Answering Br. Ex. __” refer to exhibits to the Transmittal Declaration of Callan R. Jackson
in Support of Defendant’s Answering Brief in Opposition to Plaintiff’s Motion for Partial
Summary Judgment (Dkt. 39). Page numbers to exhibits are designated by the last three
digits of a Bates number, where appropriate.
1
A. Krauss, KBL, and KBL’s Governing Documents
Plaintiff Marlene Krauss is the former Chief Executive Officer and director of
defendant KBL Merger Corp. IV (“KBL”), a special purpose acquisition company.
She served in those roles until her resignation on November 6, 2020—when KBL
entered into a business combination with 180 Life Sciences Corp., Katexco
Pharmaceuticals Corp., and CannBioRx. After the transaction closed, KBL was
renamed 180 Life Sciences Corp. (the “Company”).2
KBL’s original certificate of incorporation provided for advancement of legal
fees incurred by officers and directors in connection with their duties.3 Its July 2017
Amended and Restated Certificate of Incorporation detailed KBL’s advancement
policy in Section 8.2(a):
To the fullest extent permitted by applicable law . . . the
Corporation shall indemnify and hold harmless each
person who is or was made a party or is threatened to be
made a party to or is otherwise involved in any threatened,
pending or completed action, suit or proceeding . . . by
reason of the fact that he or she is or was a director or
officer of the Corporation . . . whether the basis of such
proceeding is alleged action in an official capacity as a
director, officer, employee or agent, or in any other
capacity while serving as a director, officer, employee or
agent, against all liability and loss suffered and
expenses (including, without limitation, attorneys’
fees . . . ) reasonably incurred by such indemnitee in
connection with such proceeding. The Corporation shall
2
Verified Am. & Suppl. Compl. for Advancement (“Compl.”) ¶¶ 2-3 (Dkt. 7).
3
Id. ¶ 6.
2
to the fullest extent not prohibited by applicable law pay
the expenses (including attorneys’ fees) incurred by an
indemnitee in defending or otherwise participating in any
proceeding in advance of its final disposition . . . .4
Section 8.2(a) also provided that approval by KBL’s board of directors (the “Board”)
was required for advancement of proceedings “initiated” by officers and directors:
Notwithstanding the foregoing provisions of this Section
8.2(a), except for proceedings to enforce rights to
indemnification and advancement of expenses, the
Corporation shall indemnify and advance expenses to an
indemnitee in connection with a proceeding (or part
thereof) initiated by such indemnitee only if such
proceeding (or part thereof) was authorized by the Board.5
And Section 8.2(b) contained a non-exclusivity provision:
The rights to indemnification and advancement of
expenses conferred on any indemnitee . . . shall not be
exclusive of any other rights that any indemnitee may have
or hereafter acquire under law, this Amended and Restated
Certificate, the Bylaws, an agreement, vote of
stockholders or disinterred directors, or otherwise.6
Section 8.2 remains unchanged in KBL’s Second Amended and Restated Certificate
of Incorporation (the “Charter”), which it adopted in connection with the business
combination.7
4
Pl.’s Opening Br. Ex. B § 8.2(a).
5
Id.
6
Id. § 8.2(b).
7
Pl.’s Opening Br. Ex. C (“Charter”) § 8.2; Compl. ¶ 7.
3
The Company’s Amended and Restated Bylaws (the “Bylaws”) also provide
for an advancement right in Section 8.2:
[A]n Indemnitee shall also have the right to be paid by the
Corporation to the fullest extent not prohibited by
applicable law the expenses (including, without limitation,
attorneys’ fees) incurred in defending or otherwise
participating in any such proceeding in advance of its final
disposition . . . provided, however, that, if the DGCL
requires, an advancement of expenses incurred by an
Indemnitee . . . shall be made only upon the Corporation’s
receipt of an undertaking . . . .8
Unlike the advancement right established in the Charter, the Bylaws do not require
Board approval for advancement of expenses related to certain types of proceedings.
B. The Lawsuits and Investigation
After the business combination closed, the United States Securities and
Exchange Commission launched an investigation into KBL’s business combination.
In April 2021, the SEC served Krauss with four subpoenas in connection with its
investigation.9 One subpoena directed Krauss to personally produce documents (the
“Krauss Subpoena”).10 The other three subpoenas were directed to entities affiliated
with Krauss that were involved in the business combination: KBL IV Sponsor LLC
8
Pl.’s Opening Br. Ex. D (“Bylaws”) § 8.2(a).
9
Compl. ¶¶ 1, 10; see Pl.’s Opening Br. Ex. E.
10
Compare Pl.’s Opening Br. Ex. E at 080 (“The subpoena requires you to provide us with
documents.”), to, e.g., id. at 056 (“The subpoena requires KBL Sponsor to produce
documents to the SEC.”).
4
(“KBL Sponsor”), KBL Healthcare Ventures LP, and KBL Healthcare Management,
Inc (together, the “KBL Entities”).11 Krauss was served with a follow-up subpoena
to the Krauss Subpoena in May 2021.12
In April 2021, the Company initiated litigation against Tyche Capital, LLC in
New York state court (the “Tyche Action”), alleging breach of contract.13 In May
2021, Tyche asserted third-party claims and served Krauss with a third-party
summons.14
On September 1, 2021, the Company filed a complaint against Krauss, KBL
Sponsor, and KBL Healthcare Management, Inc. in this court (the “Direct
Action”).15 The Company is pressing claims including breach of fiduciary duty and
alleges, among other things, that Krauss intentionally failed to disclose information
that rendered certain KBL disclosures materially false and misleading.16 Krauss and
the other named defendants filed their Answer and Verified Counterclaims and
Third-Party Complaint (the Counterclaim Complaint”) on October 5, 2021, asserting
11
See id. at 008, 032, 056.
12
Id. at 001-005.
13
180 Life Sciences Corp. v. Tyche Cap. LLC is before the Supreme Court of the State of
New York, County of New York. See Index No. 652502/2021 (N.Y. Sup. Ct., New York
County).
14
See Compl. ¶ 13.
15
See C.A. No. 2021-0754-LWW, Dkt. 1 (“Company Compl.”).
16
Id. ¶¶ 51-54.
5
counterclaims against the Company and third-party claims against the Company’s
officers and directors.17
C. Krauss’s Demands and This Litigation
On May 26, 2021, Krauss sent a letter to the Company demanding
advancement for legal fees in connection with the SEC subpoenas and Tyche
Action.18 The Company did not respond.
On June 18, 2021, Krauss submitted a second demand for advancement. Her
letter contained an undertaking to repay amounts advanced to her if it was ultimately
determined that she was not entitled to indemnification by the Company.19 Again,
there was no response.20
On August 2, 2021, Krauss sent a third demand to the Company, restating her
previous advancement requests and adding requests related to the then-threated
Direct Action. The August 2, 2021 demand also contained undertakings to repay
advanced funds.21 The Company did not respond.
17
See C.A. 2021-0754-LWW, Dkt. 9. ¶¶ 142-72 (“Countercl. Compl.”).
18
Compl. ¶ 15; Pl.’s Opening Br. Ex. G.
19
Compl. ¶¶ 16-17, 19; Pl.’s Opening Br. Ex. H.
20
Compl. ¶ 19.
21
Id. ¶ 18; Pl.’s Opening Br. Ex. I.
6
On August 19, 2021, Krauss filed her Verified Complaint for Advancement,
seeking advancement under the Company’s Charter and Bylaws.22 She subsequently
supplemented that complaint to pursue advancement in connection with the Tyche
Action and Direct Action.23 The Company answered the amended complaint on
September 23, 2021, denied that that it owed advancement to Krauss, and asserted a
number of affirmative defenses.24
On November 15, 2021, Krauss filed a motion for partial summary
judgment.25 The Company did not cross-move for summary judgment. After
briefing on Krauss’s motion was complete, I heard argument on December 7, 2021.26
II. LEGAL ANALYSIS
Under Court of Chancery Rule 56, summary judgment is appropriate when
“there is no genuine issue as to any material fact and . . . the moving party is entitled
to judgment as a matter of law.”27 “[T]he facts must be viewed in the light most
favorable to the nonmoving party and the moving party has the burden of
22
Dkt. 1.
23
Dkt. 7.
24
Dkt. 11.
25
Dkt. 35.
26
Dkt. 45.
27
Ct. Ch. R. 56(c).
7
demonstrating that there is no material question of fact.”28 “Advancement cases are
particularly appropriate for resolution on a paper record, as they principally involve
the question of whether claims pled in a complaint against a party . . . trigger a right
to advancement under the terms of a corporate instrument.”29
A. Entitlement to Advancement
Krauss seeks advancement under both the Charter and Bylaws. General rules
of contract interpretation apply when construing the provisions of a company’s
charter or bylaws.30 I must “give language which is clear, simple, and unambiguous
the force and effect required.”31
The Charter and Bylaws unambiguously provide for mandatory advancement.
Advancement is available to Krauss for expenses incurred in connection with “any
threatened, pending, or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative . . . by reason of the fact that . . . she is or was a
28
Senior Tour Players 207 Mgmt. Co. v. Golftown 207 Hldgs. Co., 853 A.2d 124, 126 (Del.
2004).
29
Int’l Rail P’rs LLC v. Am. Rail P’rs, LLC, 2020 WL 6882105, at *2 (Del. Ch. Nov. 24,
2020) (quoting DeLucca v. KKAT Mgmt., LLC, 2006 WL 224058, at *2 (Del. Ch. Jan. 23,
2006)).
30
Hill Int’l, Inc. v. Opportunity P’rs L.P., 119 A.3d 30, 38 (Del. 2015).
31
Hibbert v. Hollywood Park, Inc., 457 A.2d 339, 343 (Del. 1983).
8
director [or] officer of the Company.”32 When advancement is mandatory, the
company carries the ultimate burden of proving that advancement is not required.33
The “by reason of the fact” language found in the Charter and Bylaw
provisions replicates language in Section 145 of the Delaware General Corporation
Law.34 The “by reason of the fact” standard is satisfied when “a nexus or causal
connection” exists between the underlying proceeding and the official’s “corporate
capacity.”35 This court construes such provisions broadly to effectuate Delaware’s
policy of providing temporary relief from substantial expenses.36 “By reason of the
fact” language has been interpreted to include proceedings brought against an
32
Charter § 8.2(a) (“The Corporation shall to the fullest extent applicable by law pay
expenses (including attorneys’ fees) incurred by an indemnitee in defending or otherwise
participating in any proceeding in advance of its final disposition . . . .” (emphasis added));
see Bylaws § 8.2 (“[A]n Indemnitee shall also have the right to be paid by the Corporation
to the fullest extent not prohibited by applicable law the expenses (including, without
limitation, attorneys’ fees) incurred in defending or otherwise participating in any such
proceeding in advance of its final disposition . . . .” (emphasis added)). The Delaware
Supreme Court found that near-identical language created a mandatory and unconditional
advancement right in Homestore, Inc. v. Tafeen. 888 A.2d 204, 212-13 (Del. 2005)
(finding that bylaws providing that “[t]he Corporation shall pay all expenses” to “the fullest
extent permitted” by the Delaware General Corporation Law created a mandatory and
unconditional advancement provision).
33
See Stockman v. Heartland Indus. P’rs, L.P., 2009 WL 2096213, at *13 (Del. Ch. July
14, 2009) (“[I]n the case of a mandatory indemnification provision, the burden rests on the
party from whom indemnification is sought to prove that indemnification is not required.”).
34
See 8 Del. C. § 145.
35
Tafeen, 888 A.2d at 213. The proceedings contemplated by Section 145(e) are “any
civil, criminal, administrative or investigative action, suit or proceeding.” 8 Del C.
§ 145(e).
36
See Brown v. LiveOps, Inc., 903 A.2d 324, 327-28 (Del. Ch. 2006).
9
official for wrongdoing allegedly “committed in [her] official capacity” and “in the
course of performing [her] day-to-day . . . duties.”37
The Company presents several arguments intended to defeat Krauss’s motion:
first, that just one of the four SEC subpoenas was directed to Krauss, which was not
served “by reason of the fact” that she is a former Company fiduciary; second, that
Krauss was not named as a third-party defendant in the Tyche Action as a result of
any conduct she undertook in her capacity as a director or officer of the Company;
and third, that although parts of the Direct Action are advanceable, expenses incurred
in connection with certain defenses and Krauss’s Counterclaim Complaint are not.
I address each argument in turn.
1. The SEC Subpoenas
Regarding the subpoenas served by the SEC on Krauss and the KBL Entities,
Krauss asserts that she is entitled to advancement because the SEC investigation and
subpoenas arise out of the business combination and her former role as a director
and officer of the Company. Krauss acknowledges that she is not entitled to
advancement in connection with the subpoenas directed to the KBL Entities.38 The
37
Imbert v. LCM Int. Hldg. LCC, 2013 WL 1934563, at *5 (Del. Ch. May 7, 2013) (quoting
Reddy v. Elec. Data Sys. Corp., 2002 WL 1358761, at *6 (Del. Ch. June 18, 2002)).
38
Krauss has asked that the Company advance all expenses incurred in connection with
the subpoenas now and that allocation be addressed in a subsequent stage of the case. See
Reply Br. in Supp. of Pl.’s Mot. for Partial Summ. J. (“Pl.’s Reply Br.”) 8-9 (Dkt. 41); Oral
Arg. on Pl.’s Mot. for Partial Summ. J. Tr. Dec. 7, 2021 (“Oral Arg. Tr.”), at 27-28 (Dkt.
45).
10
KBL Entities that received the SEC subpoenas are not “indemnitees” as defined in
the Company’s Charter or Bylaws. One must be, or have been, a “director or officer
of the Corporation” to be indemnified or have their expenses advanced.39
As to the Krauss Subpoena, the Company contends that Krauss’s expenses are
not advanceable because the subpoena does not specify the capacity in which Krauss
was served. That argument does not give rise to a genuine issue of material fact.
Even viewing the evidence in the light most favorable to the Company, a causal
nexus exists between the SEC’s investigation and Krauss’s former fiduciary roles.
The SEC sought, among other things, “[a]ll Communications and other
Documents Concerning KBL’s merger discussions and negotiations with 180 Life
Sciences Corp.” and “[a]ll Communications and other Documents Concerning
KBL’s preparation or filing of its Forms 10-Q for the fiscal quarters ended June 30,
2020 and September 30, 2020.”40 It is self-evident that these documents were
requested from Krauss by virtue of her former KBL positions and not (as the
Company suggests might be the case) because she was a Company stockholder.41
Because only one of the four subpoenas is advanceable, the parties debate
how Krauss’s expenses for responding to the subpoenas should be allocated for
39
See Charter § 8.2(a); Bylaws §§ 8.1-8.2.
40
Pl.’s Opening Br. Ex. E at 089.
41
Def.’s Answering Br. 26-27.
11
purposes of calculating advancement. The Company argues that “no more than 25%
of the fees incurred” should be advanced “given that only one of the four SEC
Subpoenas is directed to Dr. Krauss.”42 Krauss proposes, instead, that her counsel
“make a good faith effort” to allocate expenses between those incurred by Krauss
and those incurred by the KBL Entities, with any expenses “benefitting both
[Krauss] and any other party to the proceeding . . . included [as] if they would have
been incurred on behalf of Krauss.”43
In Danenberg v. Fitracks, this court approved the procedure proposed by
Krauss.44 There, the plaintiff’s “counsel’s good faith estimate of work solely
performed for [other defendants] that [the] counsel would not have been forced to
address if [the plaintiff] was the sole defendant” was excluded from an
advancement.45 The same procedure will be followed here.
2. The Tyche Action
Krauss next asserts that she is entitled to advancement with respect to the
Tyche Action because she was named as a third-party defendant as a result of her
former position as an officer and director of the Company. Krauss contends that
42
Id. at 29.
43
[Proposed] Order Granting Pl.’s Mot. for Partial Summ. J. and Establishing Procedure
for Payment of Advancement to Pl. ¶ 4(a) (Dkt. 37).
44
58 A.3d 991 (Del. Ch. 2012).
45
Id. at 999-1000.
12
allegations in the Tyche Action about the Company’s disclosures are connected to
her role as a former fiduciary, causing her to be served with the Tyche third-party
complaint. In support of that position, she cites to background portions of the Tyche
third-party complaint that reference her former status as a Company fiduciary.46
The Company disagrees, asserting that Krauss was named as a third-party
defendant only because of her conduct as the principal of KBL Sponsor relating to
its personal contractual obligation. A review of the third-party claims in the light
most favorable to the Company supports that assertion. Krauss is named in one
count of the Tyche third-party complaint solely in her capacity as KBL Sponsor’s
principal.47 In particular, Tyche seeks a declaration that Krauss “as the principal . . .
of [KBL] Sponsor” was obligated to instruct KBL Sponsor to authorize the transfer
of certain shares to Tyche.48 That claim implicates the “specific and personal
contractual obligation” of KBL Sponsor.49
Had the Company cross-moved for summary judgment—as is typical in
advancement proceedings—it might have succeeded in demonstrating that Krauss is
46
See Pl.’s Opening Br. 10; Pl.’s Opening Br. Ex. F ¶ 111 (stating that “Krauss falsely
represent[ed] to the SEC and investing public that she already transferred” the shares as
context for a breach of contract claim against the Sponsor and a transfer agent).
47
Pl.’s Opening Br. Ex. F ¶¶ 117-24.
48
Id. ¶¶ 119, 124.
49
See Charney v. Am. Apparel, Inc., 2015 WL 5313769, at *16 (Del. Ch. Sept. 11, 2015)
(quoting Paolino v. Mace Sec. Int’l Inc., 985 A.2d 392, 403 (Del. Ch. 2009)).
13
not entitled to advancement for the Tyche Action as a matter of law. The alleged
wrongdoing in the third-party claim against Krauss seems divorced from her former
responsibilities or actions as a Company officer and director and explicitly concerns
her role as the principal of KBL Sponsor.50 Any purported misconduct by Krauss
with regard to the Company’s disclosures appears “essentially immaterial” to the
claim she is defending against in the Tyche Action.51
But only Krauss has sought summary judgment and the Company has not
conceded that there are no material facts in dispute.52 I therefore must deny summary
judgment on this issue. If Krauss determines to continue to press for advancement
in connection with the Tyche Action, the matter of her entitlement must be resolved
at trial.53
Krauss has proposed that any “close” question should be decided in favor of
advancement at this phase—with a final decision to be rendered in the
50
See Imbert, 2013 WL 5313769, at *5, *8 (distinguishing between conduct as a manager,
which was advanceable, and conduct as a member, which was not advanceable).
51
Lieberman v. Electrolytic Ozone, Inc., 2015 WL 5135460, at *6 (Del. Ch. Aug. 31, 2015)
(resolving cross-motions for summary judgment); see also Charney, 2015 WL 5313769,
at *16-18 (determining, on cross-motions for summary judgment, that a former director
and officer was not entitled to advancement because his former status merely “formed part
of the narrative leading to” the claim and was not necessary for the alleged violations at
issue).
52
See Oral Arg. Tr. at 40-41.
53
See Evans v. Avande, Inc., 2021 WL 4344020, at *9 n.86 (Del. Ch. Sept. 23, 2021).
14
indemnification proceeding—because she has signed an undertaking.54 That
approach would surely be more efficient. But that benefit is “outweighed by the
unreasonableness of requiring a corporation like [the Company] to bear a credit risk
that it did not contract to assume.”55
3. The Direct Action
Finally, Krauss seeks “advancement of expenses related to her full defense of
the Direct Action, which includes her affirmative defenses, her counterclaims, and
[] third-party claims.”56 The Company concedes that Krauss is entitled to
advancement for portions of the Company’s complaint against her. It contests
advancement related to Krauss’s counterclaims, third-party claims, and certain of
her defenses.
a. Defenses and Affirmative Defenses
The Company argues that Krauss is not entitled to advancement for three of
her affirmative defenses and any defenses related to allegations that she caused
unauthorized transfers of Company funds after her resignation. But its arguments
do not give rise to a genuine issue of material fact. Summary judgment is granted
54
Oral Arg. Tr. at 30.
55
Fasciana v. Electronic Data Sys. Corp., 829 A.2d 160, 175 (Del. Ch. 2003).
56
Pl.’s Opening Br. 20.
15
as to the advancement of expenses for Krauss’s defenses in the Direct Action. It is
also granted with regard to her affirmative defenses.
With respect to Krauss’s defenses to the unauthorized transfer allegations, the
associated causes of action—for ultra vires acts, unjust enrichment, and associated
declaratory relief—all satisfy the “by reason of the fact” requirement.57 The
Company accuses Krauss of, for example, “falsely attesting to KBL’s Consolidated
Financial Statements,” “engaging in [improper] Money Transfers,” and
“conspir[ing] to misappropriate . . . and misapproriat[ing]” monies belonging to the
Company.58 It is unclear how Krauss could have signed off on the Company’s
financial statements or (allegedly) embezzled funds if she had not been a director or
officer. And the Company’s complaint in the Direct Action notes that Krauss was
“responsible for all aspects of [the Company’s] operations, finances, and procedures,
including without limitation, those relating to the financial health” and “reporting
and disclosure obligations” of the Company and the “proper use and payment of [the
Company’s] monetary assets.”59 The Company cannot withhold advancement for
Krauss’s defense (effectively) by its own admission.
57
Company Compl. ¶¶ 55-60, 66-69.
58
Id. ¶¶ 56, 59.
59
Id. ¶ 62.
16
Given the broad view of a defense in the advancement context, Krauss is also
entitled to advancement for her affirmative defenses.60 The Company contends that
Krauss’s affirmative defenses should be viewed as “offensive arguments” that do
not warrant advancement.61 The only case cited in support of that proposition is
Mooney v. Echo Therapeutics, Inc., which does not equate affirmative defenses to
offensive litigation but focuses on whether advancement is triggered by affirmative
defenses asserted by the indemnitor (rather than the indemnitee).62 Each of the
defenses raised by Krauss—in pari delicto, unclean hands, and fraud—are
traditional affirmative defenses. Even viewing the facts in the light most favorable
to the Company, they have been raised to defeat allegations in the Direct Action that
implicate Krauss’s former corporate capacity.63
b. Counterclaims and Third-Party Claims
The Company’s arguments against advancing Krauss’s counterclaims and
third-party claims in the Direct Action are more nuanced.
First, the Company contends that Krauss’s claims are “proceedings . . .
initiated by” Krauss that, according to the Charter, are advanceable “only if such
60
See Citadel Hldg. Corp. v. Roven, 603 A.2d 818, 824 (Del. 1992) (noting that “[i]n a
litigation context the term ‘defense’ has broad meaning,” and finding that an indemnity
agreement “clear[ly]” covered affirmative defenses).
61
Def.’s Answering Br. 46.
62
2015 WL 3413272, at *2, *11 (Del. Ch. May 28, 2015).
63
See Countercl. Compl. at 31-33.
17
proceedings (or part thereof) w[ere] authorized by the [Company’s] Board.”64 But
the Bylaws provide for a separate, exclusive right to advancement—one that does
not conflict with and is not limited by the Charter.65 Section 8.2(b) of the Charter
states that “[t]he rights to indemnification and advancement of expenses conferred
on any indemnitee . . . shall not be exclusive of any other rights that any indemnitee
may have or hereafter acquire under the law . . . the Bylaws . . . or otherwise.”66
Section 8.2 of the Bylaws creates an advancement right “to the fullest extent
not prohibited by applicable law” with no limiting language and in addition to the
advancement right provided in the certificate of incorporation.67 By contrast,
Section 8.1 of the Bylaws—related to indemnification—includes a limitation
64
Charter § 8.2(a); see Def.’s Answering Br. 40-41.
65
See, e.g., Katzman v. Comprehensive Care Corp., C.A. No. 5892-VCL, at 4-5 (Del. Ch.
Dec. 28, 2010) (TRANSCRIPT) (“The basic principle is that indemnification and
advancement rights from one source are nonexclusive of other sources unless there is a
specific agreement otherwise. What that means is a statutory right under Section 145(c) is
independent and nonexclusive of a charter right, which in turn is independent and
nonexclusive of any bylaw right, which in turn is independent and nonexclusive of any
contract right, absent specific agreement to the contrary.”); Evans v. Avande, Inc., C.A.
2018-0454-LWW, at 76-78 (Del. Ch. June 25, 2021) (TRANSCRIPT) (finding a director’s
right to indemnification under a company’s bylaws separate from other indemnification
rights).
66
Charter § 8.2(b).
67
Bylaws § 8.2. The Company argues that the limiting language in Section 8.1 of the
Bylaws applies to Section 8.2 by virtue of the defined term “Indemnitee” being used in
both sections. See Def.’s Answering Br. 41. I find that argument unpersuasive. The board
authorization language in Section 8.1 is not related to the defined term, and there is no
reason to read it into Section 8.2 simply because both sections refer to “Indemnitees.” See
Bylaws §§ 8.1, 8.2; Paolino, 2009 WL 4652894, at *10 (declining to extend a limitation in
an indemnification bylaw to the subsequent advancement bylaw).
18
identical to the one in Section 8.2(a) of the Charter.68 In Homestore, Inc. v. Tafeen,
the Delaware Supreme Court explained that Section 145 “expressly contemplates
that corporations may confer a right to advancement that is greater than the right to
indemnification.”69 Accordingly, Krauss can seek advancement for her claims
pursuant to the Bylaws, which do not require Board approval.
Next, the Company argues that advancement for the Counterclaim Complaint
is unavailable because they are not brought by reason of the fact that Krauss was a
Company fiduciary. That may well be so regarding Count V of the Counterclaim
Complaint, which is brought by KBL Sponsor.70 KBL Sponsor is not an indemnitee
under the Company’s Bylaws.71 I therefore must deny Krauss’s motion for summary
judgment on advancement for Count V of the Counterclaim Complaint.
Krauss’s remaining counterclaims consist of breach of contract claims related
to a “Sponsor Registration Rights Agreement,” a breach of contract claim in
connection with Krauss’s resignation agreement, and a request for declaratory
judgment.72 The Company contends that these counterclaims are not advanceable
68
See Bylaws § 8.1.
69
888 A.2d at 212.
70
Countercl. Compl. ¶¶ 167-72.
71
See supra note 39 and accompanying text.
72
Countercl. Compl. ¶¶ 147-66, 173-76.
19
because they are brought in Krauss’s personal capacity as a stockholder or arise out
of her personal contractual obligations.73
But certain of these counterclaims are compulsory. Where the underlying
action is brought against a defendant “by reason of such person being or having been
a director or officer,” her counterclaims are advanceable if they are (1) “necessarily
part of the same dispute” as the underlying action (i.e., compulsory) and (2)
“advanced to defeat, or offset” the underlying claims.74 Counterclaims are
compulsory under Delaware law where they “arise[] out of the transaction or
occurrence that is the subject matter of the opposing party’s claim.”75 In such a
scenario, advancement is owed. This court has held, for instance, that a company
was required to advance fees in connection with a books and records action—
naturally brought in the plaintiff’s capacity as a stockholder—because the “books
and records [were sought] to defend claims against him as a Manager.”76
The claims against Krauss in the Direct Action concern her alleged false
attestation regarding KBL financial statements, self-dealing monetary transfers,
73
Def.’s Answering Br. 42-43.
74
Pontone v. Milso Indus. Corp., 2014 WL 2439973, at *3, *7 (Del. Ch. May 29, 2014);
id. at *4 (“Delaware courts repeatedly have held that the baseline requirement for a
counterclaim to be advanceable is that it qualify as compulsory.”); see Roven, 603 A.2d at
824.
75
Ct. Ch. R. 13(a).
76
Imbert, 2013 WL 1934563, at *11.
20
improper redemption of KBL shares before the closing of the business combination,
and improper issuance of shares to an investment bank for services rendered to
KBL.77 These allegations all stem from events taking place in and around November
2020.
Krauss’s resignation agreement is part of the transactions or occurrences
underlying the Direct Action. The Direct Action complaint alleges that “Krauss’[s]
signing of the Resignation Agreement on behalf of both herself individually and on
behalf of KBL constituted a conflict of interest” and that it created one of the
“liabilities of KBL which were not recorded and/or disclosed as contingent liabilities
payable . . . in the Consolidated Financial Statements.”78 The Company contends
that Krauss had “actual knowledge” of the liabilities, and the alleged intentional
exclusion of the resignation agreement liability from KBL’s financial statements
forms one of the bases for its claims against Krauss in Counts I and II of the Direct
Action complaint.79
Further, the Company’s list of alleged unauthorized transfers in the Direct
Action complaint includes a transfer that is tied to Krauss’s resignation counterclaim
in its amount and timing.80 Krauss’s resignation agreement counterclaim against the
77
Company Compl. ¶¶ 51-69.
78
Id. ¶¶ 31, 33.
79
Id. ¶ 32.
80
Id. ¶¶ 34, 53, 56.
21
Company—Count IV of the Counterclaim Complaint—therefore meets the first
prong of the test to determine whether it is advanceable: it is compulsory. Because
it is also brought to offset the underlying claims, it is advanceable.81
Whether the counterclaims related to the Sponsor Registration Rights
Agreement—Counts II and III—are compulsory is a closer call. Krauss reads
“transactions or occurrences” broadly by linking any breach of a contract signed in
connection with the business combination—regardless of the time—with the
business combination itself.82 The Company’s claims in the Direct Action are
centered around events connected to the business combination in November 2020.
Krauss’s counterclaims, however, pertain to February and August 2021 Form S-1
registration statements and an alleged triggering of notice rights under the Sponsor
Registration Rights Agreement in July 2021.83 The Company’s claims and Krauss’s
81
The term “offset” is broad. Pontone, 2014 WL 2439973, at *4-5 (declining to limit the
“advanced to defeat, of offset” prong and implying that the breadth of what constitutes
“defending” an action means that “offset” should be read broadly as well); see Roven, 603
A.2d at 824 (finding that “defending” a suit includes pursuing and affirmative defenses and
certain counterclaims).
82
See, e.g., Pl.’s Reply Br. at 23-24 (“Each of the claims against Dr. Krauss in the Direct
Action is related to actions she took in connection with the Business Combination, and all
of the Counterclaims and Third-Party claims similarly relate to actions the Company and
its officers and directors took in relation to that transaction.”).
83
Countercl. Compl. ¶¶ 124-26, 136, 152, 159.
22
Sponsor Registration Rights Agreement counterclaims are not “necessarily part of
the same dispute.”84 She is not entitled to summary judgment on that basis.
I likewise cannot conclude that summary judgment is warranted on Krauss’s
entitlement to advancement for her declaratory judgment counterclaim (Count VI).
That counterclaim does not reference the resignation agreement claim but rather
seeks an order declaring that the Company breached Krauss’s rights under the
Sponsor Registration Rights Agreement, that its directors and officers breached their
fiduciary duties, that certain Company shares should be registered pursuant to the
Sponsor Registration Rights Agreement, and that Krauss did not breach her fiduciary
duties.85 The first three declarations are simply declaratory judgment parallels of
claims that were found not to be advanceable. And a declaration that “Dr. Krauss
did not breach her fiduciary duties while she was both a director and the CEO of the
Company” is effectively equivalent to defending herself in the underlying claim.
That leaves the question of whether Krauss’s third-party claim is advanceable.
It is difficult to see how her third-party claim—which is essentially a new action
against previously-unnamed parties—are compulsory. “The general rule is that
offensive litigation is not advanceable.”86 I cannot conclude, as a matter of law, that
84
Pontone, 2014 WL 2439973, at *7.
85
Countercl. Compl. ¶ 176.
86
Mooney, 2015 WL 3413272, at *11.
23
Krauss was acting to defeat claims against her by pleading an additional claim
against third-party defendants. Krauss cites no authority that would support a
different result. Summary judgment with regard to Krauss’s third-party claim is
denied.
* * *
Regarding Krauss’s defense to the Direct Action, the motion for summary is
granted in part. Krauss is owed advancement in connection with her defenses,
including affirmative defenses, and Count IV of the Counterclaim Complaint as a
matter of law. The motion is otherwise denied as to advancement for the Direct
Action.
B. Fees-on-Fees and Prejudgment Interest
Absent an agreement otherwise, parties who successfully prosecute an
advancement action are typically entitled to an award of fees for their expenses in
litigating the suit.87 The Company acknowledges that Krauss is entitled to fees-on-
fees relating to this advancement action “proportionate to her success.”88 Section 8.3
of the Bylaws states that, “[i]f successful in whole or in part in [bringing] any
87
See Stifel Fin. Corp. v. Cochran, 809 A.2d 555, 560-62 (Del. 2002) (noting that “without
an award of attorneys’ fees for the indemnification suit itself, indemnification would be
incomplete”); Weaver v. ZeniMax Media, Inc., 2004 WL 243163, at *7 (Del. Ch. Jan. 30,
2004) (“‘Fees on fees’ are an inherent right of the party materially successful in asserting
a claim for indemnification or advancement.”).
88
Def.’s Answering Br. 49.
24
[advancement] suit . . . [an] Indemnitee shall also be entitled to be paid the expense
of prosecuting or defending such suit.”89 Krauss is therefore owed fees-on-fees in
accordance with the findings of the court above.
The Company also owes Krauss prejudgment interest.90 The Company argues
that the interest is not owed until Krauss submits unredacted copies of all invoices
for which she claims entitlement to advancement.91 But Krauss has stipulated that
she is not seeking advancement for the redacted portions of the invoices.92 Pre-
judgment interest is awarded “for the period of time when [the Company]
unjustifiably refused to provide advancement”93—that is, starting twenty days after
Krauss’s demands for advancement.94
III. CONCLUSION
Partial summary judgment is entered for Krauss, in part. The Company must
advance to Krauss her fees and expenses incurred in connection with the Krauss
Subpoena and her defenses (including affirmative defenses) and one counterclaim
89
Bylaws § 8.3.
90
Roven, 603 A.2d at 826 (“[P]re-judgment interest is a matter of right.”).
91
See Def.’s Answering Br. 19, 49-50.
92
Pl.’s Reply Br. 25.
93
Citrin v. Int’l Airport Ctrs. LLC, 922 A.2d 1164, 1167 (Del. Ch. 2006).
94
See Bylaws § 8.3 (requiring advancement of expenses to be paid in full within 20 days).
25
in the Direct Action. The parties are to confer and, within ten days, submit an
implementing order consistent with this decision.
Because summary judgment is also denied in part, questions of entitlement
remain to be decided. The parties are directed to submit a joint letter within ten days
setting forth their respective positions on a procedure for resolving the outstanding
entitlement issues and for the payment of advancement consistent with Fitracks,
insofar as Krauss has been found entitled to advancement as a matter of law.
26