On November 28, 2016, the Supreme Court of Delaware confirmed what had become a common thread in several previous decisions by the Court of Chancery–that a Delaware entity cannot avoid expansive advancement rights it has granted to its officers and directors by arguing that they had fraudulently induced the company to grant those rights. In Trascent Mgm't Consulting, LLC v. Bouri, No. 126, 2016 (Del. Supr.), the Supreme Court held that such a challenge to an officer's right to advancement of fees and expenses for litigation was more properly heard during later proceedings to determine whether the officer was ultimately entitled to a right to indemnification upon the close of the underlying proceedings.
Trascent had hired Mr. Bouri as an officer and manager of the LLC with responsibility for the human resources, IT, and finance functions. Mr. Bouri was employed pursuant to an employment agreement, which among other things, granted him broad rights to advancement of any fees and expenses he incurred in certain types of proceedings. Trascent and Mr. Bouri parted ways, and Trascent sued Mr. Bouri for, among other things, breaches of his employment agreement. Pointing to the terms of that employment agreement, Mr. Bouri sought advancement of his fees and expenses for defending against his former employer's claims. Trascent, however, argued that the same agreement upon which its claims were founded was induced by fraud, and therefore, Mr. Bouri's claims for advancement should be denied.
The Court of Chancery rejected this defense, and the Supreme Court (with Chief Justice Strine writing for the court) affirmed that ruling. As the Supreme Court noted: "[A]llowing Trascent to avoid its contractual duty to make immediate advancement payments by making a belated fraudulent inducement claim would impede the efficiency of the summary mechanism provided by 8 Del. C. 145(k) and impair the public policies served by contractual advancement provisions made in reliance upon that provision of the DGCL as well as the Limited Liability Company Act," and therefore "the Court of Chancery properly refused to delay enforcing the plain language of the contract."
The Supreme Court, in a footnote, also noted that the reasoning and public policy supporting this ruling was equally applicable to agreements to arbitrate disputes–another area where the Court found these fraudulent inducement arguments to reflect "unproductive gamesmanship." The court warned that parties should make such arguments to the arbitrator in the first instance and not a court in trying to avoid the contractual choice of venue for dispute resolution.
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