Alerts and Updates
Citing "Issue Preclusion," the Delaware Court of Chancery Denies Advancement to a Company's Vice President
August 5, 2016
Vice Chancellor Laster explained that his analysis of Plaintiff’s arguments was constrained by the doctrine of “issue preclusion,” which prevented Plaintiff from relitigating matters that the Third Circuit decided when it vacated the District Court’s finding in Plaintiff’s favor.
The Delaware Court of Chancery typically holds that a corporation must advance the fees and expenses of an executive or officer-level employee who is required to defend a civil, criminal, administrative or investigative action by virtue of his or her employment with the company. Recently, however, Vice Chancellor J. Travis Laster held that a plaintiff was not entitled to advancement because he did not prove that someone with the bare title of “Vice President,” without any managerial or supervisory responsibilities, fit within the definition of “officer” found in the relevant bylaws.
The Court of Chancery’s holding in Aleynikov v. The Goldman Sachs Group, Inc., C.A. No. 10636-VCL (Del. Ch., July 13, 2016) was based, in large part, on its conclusion that it was bound by an incorrect finding by the Third Circuit in a related action because the doctrine of “issue preclusion prevent[ed] relitigation of wrong decisions just as much as right ones.” B&B Hardware, Inc. v. Hargis Indus., Inc., 135 S. Ct. 1293, 1308 (2015). Given that the majority of this opinion addresses how “issue preclusion” is construed under New Jersey law, its usefulness for Delaware advancement cases is limited. Still, Vice Chancellor Laster’s approach appears to demonstrate Delaware’s predisposition in favor of advancement and indemnification rights.
Plaintiff Sergey Aleynikov (“Plaintiff”) held the title of Vice President in the Equities Division of a subsidiary of The Goldman Sachs Group, Inc. (“Goldman”). Despite his title, Plaintiff did not have any managerial or supervisory responsibilities. On September 25, 2012, Plaintiff filed a complaint in the District of New Jersey (the “District Court”), asserting that under Goldman’s bylaws (the “Bylaws”), he was entitled to indemnification for his successful defense of a criminal proceeding in federal court and advancement to defend a criminal proceeding in state court. The Bylaws provided for advancement and indemnification to any “officer” of Goldman’s subsidiaries, but the term “officer” was vaguely defined as “any officer of such entity, any person serving in a similar capacity or as the manager of such entity.” The District Court granted Plaintiff’s motion for summary judgment, but on appeal, the Third Circuit reversed and vacated the lower court’s ruling.
Plaintiff then filed suit in the Delaware Court of Chancery, seeking advancements to defend counterclaims brought against him by Goldman and its subsidiary in the District Court. Plaintiff had the burden of proving by a preponderance of the evidence that he was an “officer” of Goldman’s subsidiary and entitled to advancement under the Bylaws. After a one-day trial, Vice Chancellor Laster held that Plaintiff failed to satisfy his burden.
Vice Chancellor Laster explained that his analysis of Plaintiff’s arguments was constrained by the doctrine of “issue preclusion,” which prevented Plaintiff from relitigating matters that the Third Circuit decided when it vacated the District Court’s finding in Plaintiff’s favor. Applying New Jersey law, the Court of Chancery found that two of the Third Circuit’s rulings had preclusive effect in this action. The first was the conclusion that the definition of “officer” in the Bylaws was ambiguous, and the second was that the doctrine of contra proferentem should not apply to construe the Bylaws against Goldman.
Vice Chancellor Laster disagreed strongly with the second ruling. The Third Circuit explained its holding by asserting that contra proferentem would put the cart before the horse by resolving the Bylaws’ ambiguities in favor of Plaintiff before even determining whether Plaintiff was subject to the Bylaws. The Court of Chancery flatly rejected that position, noting that Plaintiff was undeniably entitled to the benefits of the Bylaws by virtue of his employment with Goldman’s subsidiary. Thus, the only question was whether the right to advancement was one of those benefits. Vice Chancellor Laster opined that this is the type of situation where the doctrine of contra proferentem should and does apply. He then provided an extensive list of reasons for his position, including that:
- Goldman unilaterally drafted its Bylaws and, therefore, was in the best position to remove any ambiguity relating to the definition of “officer.”
- Goldman drafted its Bylaws so it should be held responsible for any reasonable expectation created by the Bylaws.
- An individual with the title “Vice President” could reasonably conclude that he was an “officer” who was entitled to advancement rights under the Bylaws. It is for that reason that the Third Circuit found that the definition of “officer” was ambiguous and the District Court granted summary judgment in Plaintiff’s favor.
- The Bylaws identify the set of “officers” for Goldman as including “vice presidents.”
- A definition of “officers” that encompasses “vice presidents” is consistent with:
- Delaware General Corporation Law
- Tradition at commercial and investment banks, dating back to 1929
- Federal securities law
- Goldman created ambiguity by handing the title of “Vice President” out freely, both to individuals that it considered officers and to those that it did not.
- Corporations are allowed to provide advancement rights to as many people as they would like, so the fact that a company has a large number of “vice presidents” would not lead a reasonable person to assume that every “vice president” did not possess advancement rights.
- A reasonable person with the title “Vice President” would not assume that that he or she was not an “officer” simply because he or she did not receive formal appointment from the board of directors.
- A “vice president” without supervisory or managerial functions could still be an “officer.”
- Delaware’s policy in favor of advancement and indemnification requires bylaws to be read in favor of the existence of advancement and indemnification rights.
Ultimately, Vice Chancellor Laster acknowledged that he was bound by the Third Circuit’s decision not to apply the doctrine of contra proferentem and looked to other evidence to support Plaintiff’s assertion that he was entitled to advancement as an “officer” of Goldman’s subsidiary. Finding none, the Court of Chancery entered judgment in Goldman’s favor.
Although Vice Chancellor Laster did not find that Plaintiff was entitled to advancement under the Bylaws, this decision reinforces the Delaware policy in favor of advancement and indemnification rights. Vice Chancellor Laster spent a considerable portion of his opinion explaining how the Third Circuit should have (and the Court of Chancery likely would have) used the doctrine of contra proferentem to construe ambiguities in bylaws in favor of the individual seeking advancement or indemnification.
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