Wong v. USES Holding Corp., C.A. No. 11475 (Del. Ch. Apr. 5, 2016)

The Court of Chancery was asked to determine whether a former director and former officer were entitled to recover all fees they incurred to contest their former corporation’s refusal to provide advancement. This is commonly known as “fees on fees.” The bylaws of the corporation provided:

[I]f the Delaware Statute requires, an advancement of expenses incurred by an indemnitee in his or her capacity as a director or officer . . . shall be made only upon delivery to the Corporation of an undertaking . . . by or on behalf of such indemnitee, to repay all amounts so advanced if it shall ultimately be determined by final judicial decision . . . that such indemnitee is not entitled to be indemnified . . . .

The corporation argued that plaintiffs filed suit for advancement prematurely.  The bylaws provided the corporation with 60 days to respond to a request for fees on fees and the suit was filed only 35 days after the request for indemnification was delivered. The court disagreed and interpreted the bylaw to mean that the corporation had 60 days to consider a request for advancement.  However, since the corporation had rejected the claim for advancement before the end of the 60-day period, there was no need for the plaintiffs to wait 60 days for their rights to accrue.

BOTTOM LINE: “Fees on Fees” begin to accrue on the date the director or officer complies with the undertakings required in the corporation’s bylaws and the DCGL. Care must be taken to precisely set forth the conditions that must be fulfilled by the indemnitee.