GLASSCOCK, Vice Chancellor.
No corporation can be a success unless led by competent and energetic officers and directors. Such individuals would be unwilling to serve if exposed to the broad range of potential liability and legal costs inherent in such service despite the most scrupulous regard for the interests of stockholders. This is the rationale behind the indemnification and advancement provisions of Delaware corporate law. Currently before me are several issues arising from those provisions and from a contract between the parties providing for the indemnification of the Plaintiff.
Delaware statutory law is largely enabling with respect to the indemnification rights of corporate officers and directors. The Delaware General Corporation Law ("DGCL") sets two boundaries for indemnification: The statute requires a corporation to indemnify a person who was made a party to a proceeding by reason of his service to the corporation and has achieved success on the merits or otherwise in that proceeding. At the other end of the spectrum, the statute prohibits a corporation from indemnifying a corporate official who was not successful in the underlying proceeding and has acted, essentially, in bad faith. In setting these broad boundaries, Delaware law furthers important public policy goals of encouraging corporate officials to resist unmeritorious claims and allowing corporations to attract qualified officers and directors by agreeing to indemnify them against losses and expenses they incur personally as a result of their service.
For any circumstance between the extremes of "success" and "bad faith," the DGCL leaves the corporation with the discretion to determine whether to indemnify its officer or director. Consequently, corporations routinely refine their indemnification obligations by charter, bylaw, or contract. Thus, because indemnification between the boundaries of "success" and "bad faith" is permissive, when a corporation has established by contract the indemnification rights of a corporate official, the agreement controls unless it conflicts with a mandatory statutory provision.
In this case, the Plaintiff, a former corporate officer, is suing the Defendant, his former employer, for advancement and indemnification in connection with several proceedings that arose out of regulatory and criminal investigations at the Defendant corporation. The Plaintiff and Defendant are parties to an Indemnification Agreement that generally makes mandatory what are permissive provisions for indemnification under the DGCL. The dispute centers around whether the Plaintiff succeeded on the merits of any of the aforementioned proceedings, thus entitling him to indemnification as a matter of law, or whether additional discovery is required to determine whether the Plaintiff acted in good faith, in which case he will be entitled to indemnification under the Indemnification Agreement. The parties have briefed the matter, and I consider it submitted as on cross-motions for partial summary judgment. For the indemnification claims that require additional discovery regarding the Plaintiff's good faith, I set forth the scope of evidence relevant to that issue.
This case involves a number of indemnification and advancement claims by Plaintiff Marc S. Hermelin against his former employer, Defendant K-V Pharmaceutical Company ("KV"). Hermelin, who served as CEO of KV from 1975 to 2008 and held various positions on KV's Board of Directors from 1975 to 2010, seeks indemnification or advancement for several criminal, civil, and regulatory matters that arose following KV's distribution of oversized morphine sulfate tablets into the market. The facts giving rise to the proceedings at issue are more relevant to permissive indemnification than mandatory indemnification, the former of which requires that the indemnitee meet a "good faith" standard of conduct. Although, as I explain below, I cannot reach a decision on permissive indemnification on the current record, a brief summary of the undisputed background facts is useful.
In May 2008, two pharmacies notified KV that they had received oversized morphine sulfate tablets from KV. These tablets were manufactured by KV and distributed by ETHEX Corporation ("ETHEX"), a subsidiary of KV. KV began an internal investigation into the cause of the distribution of the oversized tablets. In the course of its investigation, KV discovered that it had manufactured additional oversized tablets, including propafenone, an anti-arrhythmic drug, and dextroamphetamine sulfate, a stimulant. KV notified the Food and Drug Administration ("FDA") of its discovery of the oversized morphine sulfate tablets, but it did not report its discovery of the other oversized pills.
Following these events and after receiving complaints from employees, KV's Audit Committee conducted an internal investigation and ultimately decided to terminate for cause Hermelin's employment as CEO of KV. The disclosure of Hermelin's termination in KV's Form 8-K filing precipitated an investigation by the U.S. Attorney's Office for the Eastern District of Missouri ("USAO") and regulatory actions by the FDA and the Office of Inspector General of the Department of Health and Human Services ("OIG"). Hermelin seeks advancement and indemnification for several proceedings arising out of these investigations and regulatory actions.
In his Verified Amended Complaint ("Complaint"), Hermelin sought a declaration that he was entitled to indemnification for six completed proceedings arising from his conduct during his employment with KV. Two of those proceedings are no longer at issue,
Arguing that none of these matters justifies mandatory indemnification, KV invokes the "victory" of Pyrrhus of Epirus at the Battle of Asculum in 279 B.C. and asserts that any success by Hermelin in the underlying actions was a win as bad as a defeat.
In August 2008, KV's Audit Committee began an investigation into allegations by KV employees that Hermelin had refused to take appropriate action in response to the discovery that KV's manufacturing process had produced several oversized tablets. The Audit Committee retained independent counsel and purportedly conducted over fifty interviews and obtained and reviewed hundreds of thousands of documents. Hermelin retained his own counsel during the investigation. Following this investigation, the board decided in December 2008 to terminate Hermelin's employment for cause.
Soon after Hermelin's departure as CEO of KV, the USAO began an investigation into KV's release of oversized pills into the market. Based on Hermelin's position as a responsible corporate officer of both KV and ETHEX,
Hermelin contends that the USAO could have brought more serious charges against him and that by pleading guilty to the two charged strict liability misdemeanors he avoided conviction on those harsher charges. On this basis, Hermelin argues that he was "successful on the merits or otherwise" in the Criminal Matter, and he seeks indemnification for his $1.9 million criminal penalty as well as his attorney fees and expenses. KV counters that Hermelin's incarceration and his payment of a large fine are per se indicators that Hermelin was not successful on the merits or otherwise.
The FDA Consent Decree Matter involved an investigation by the FDA, during December 15, 2008, to February 2, 2009, into whether KV's manufacturing facilities and processes were in compliance with current Good Manufacturing Practices ("cGMP"). The FDA sought an injunction generally requiring KV, Hermelin, and other named defendants to refrain from manufacturing, holding, or distributing any drug until certain cGMP and quality control measures were undertaken by the defendants.
Hermelin argues that because the FDA's investigation did not find him guilty of misconduct and because the Consent Decree does not apply to him, he achieved success in the FDA Consent Decree Matter. KV asserts that Hermelin was not successful because the Consent Decree effectively bars Hermelin from returning to KV, and such a result cannot be construed as "success."
The HHS Exclusion Matter involved a determination by the OIG to exclude Hermelin from all federal healthcare programs. In May 2010, Hermelin received notice from the OIG of its intent to exclude him from all federal healthcare programs based on his association with ETHEX, a subsidiary of KV that had already been convicted of violating federal law. This exclusion would effectively prevent Hermelin from claiming payment under any federal healthcare program for any items or services he rendered. The exclusion was to be based on federal law permitting the exclusion of an individual "(i) who has a direct or indirect ownership or control interest in a sanctioned entity and knows or should know . . . of the action constituting the basis for the conviction or exclusion . . . or (ii) who is an officer or managing employee . . . of such entity."
Unlike Hermelin, KV faced the threat of mandatory exclusion by state Medicaid agencies based on its potential ownership of an excluded entity (ETHEX) and its being controlled by an excluded individual (Hermelin).
KV also faced mandatory exclusion due to Hermelin's controlling interest in the company. Hermelin contends that he was faced with a "Hobson's Choice"
Hermelin now argues that he should not be "punished" (by having to bear his own legal expenses) for falling on his proverbial sword, and that KV must indemnify him for his expenses in connection with the HHS Exclusion Matter.
In addition to his claims for indemnification for the matters described above, Hermelin seeks advancement for his legal fees and expenses in prosecuting an action for injunctive relief against the St. Louis County Jail, where Hermelin was incarcerated following his conviction in the Criminal Matter. After pleading guilty on March 10, 2011, in the Criminal Matter to two federal strict liability misdemeanor charges, the District Court, in addition to imposing a $1.9 million fine and forfeiture, sentenced Hermelin to a jail term of "30 days or less" in the St. Louis County Jail. Hermelin spent fifteen days in jail, beginning March 14, 2011. During his jail stint, Hermelin received and conversed with several visitors, including his wife, other family members, friends, clergy, and his personal assistant. Hermelin did not discuss KV or its business during his stay. Rather, his conversations were of a private and personal nature and included discussions related to medical, religious, legal, and other private matters. These conversations were recorded per the jail's policy.
On April 25, 2011, a reporter at the St. Louis Post-Dispatch requested, under the purported authority of the Missouri Sunshine Law, a number of records from the jail pertaining to Hermelin's incarceration. According to Hermelin, the reporter requested these records because the Post-Dispatch was covering the demise of KV and Hermelin's role therein. The requested records included visitation logs, documents related to disciplinary findings or proceedings involving Hermelin's incarceration, and, at issue here, recordings of telephone calls made and received by Hermelin and conversations he had with visitors while incarcerated. On May 5, the Jail released to the newspaper everything except the recordings and stated its intent to release the recordings unless ordered otherwise. Hermelin filed suit to enjoin the release of the recordings, arguing that they were of a private and personal nature. The Circuit Court of St. Louis County entered a permanent injunction on December 6, 2011, enjoining the release of the recordings by the jail on the grounds that the conversations were "purely private matters."
Hermelin's Indemnification Agreement excludes indemnification for actions or portions thereof initiated by the indemnitee. Hermelin contends that he is nonetheless entitled to advancement because he effectively did not initiate the Jail Records Matter, but rather employed the only defense available to him when he was faced with the potential disclosure of sensitive private information. Additionally, Hermelin argues that his action for injunctive relief was the equivalent of a compulsory counterclaim and that the Indemnification Agreement does not except such claims from advancement. KV asserts that Hermelin's action for an injunction clearly falls within the exceptions that the Indemnification Agreement carves out of Hermelin's advancement rights. KV also argues that even if the Indemnification Agreement requires advancement for compulsory counterclaims, Hermelin's lawsuit was not a compulsory counterclaim because it was not "compulsory" as defined in the Federal Rules of Civil Procedure or Court of Chancery Rules.
The parties briefed the issue of whether Hermelin is entitled to advancement for the Jail Records Matter, and the parties presented oral argument on that issue on January 5, 2012. I now find, for the reasons stated below, that the Indemnification Agreement expressly excludes advancement for the Jail Records Matter on the grounds that Hermelin initiated the action for injunctive relief.
I also decide here Hermelin's entitlement to mandatory indemnification and the scope of relevant, discoverable evidence going forward in regards to permissive indemnification. As I explain below, the court can determine an indemnitee's right to mandatory indemnification, which turns on whether the indemnitee succeeded in a proceeding on the merits or otherwise, on a record substantially more limited than that required to determine the indemnitee's right to permissive indemnification, which inquires into the indemnitee's good faith. Given this disparity in the evidence necessary for a determination on mandatory versus permissive indemnification, I requested briefing from the parties addressing whether the Plaintiff was "successful" in any of the proceedings for which he seeks indemnification—thus triggering mandatory indemnification under 8 Del. C. § 145(c)—and, for the proceedings for which mandatory indemnification is not available, what the proper scope of relevant evidence is in regards to permissive indemnification under 8 Del. C. § 145(a).
Neither party in its papers has alleged that there are material issues of fact that prevent me from reaching a decision on the issues of advancement, mandatory indemnification, or the scope of relevant evidence for the purposes of permissive indemnification. Additionally, the parties agreed at Oral Argument on January 5, 2012, that their briefing on these issues should be treated as cross-motions for summary judgment.
Hermelin and KV are parties to an Indemnification Agreement, the language of which provides the primary source of KV's indemnification obligations. The Indemnification Agreement provides that in any proceeding commenced to enforce Hermelin's right to indemnification, KV "shall, to the fullest extent not prohibited by law, have the burden of proof to overcome that presumption."
Delaware law authorizes corporations to advance expenses incurred by their officers or directors in defending any "action, suit or proceeding" for which indemnification is permitted.
Section 4(a) of the Indemnification Agreement provides:
Section 3(b)(iv) provides a key exception to indemnification and advancement: "Indemnitee shall receive no indemnification of Expenses . . . in connection with any Proceeding, or part thereof (including claims and permissive counterclaims) initiated by Indemnitee . . . unless the Proceeding (or part thereof) was authorized by [KV's] Board of Directors . . . ."
Hermelin's argument that the Post-Dispatch or the Jail's Custodian of Records initiated the Jail Records Matter by threatening to release Hermelin's recorded private conversations simply misconstrues the language of Section 3(b)(iv). Section 3(b)(iv) not only excludes proceedings initiated by Hermelin, but also "part[s] . . . (including claims and permissive counterclaims)" initiated by Hermelin.
In the alternative, Hermelin argues that his claim for injunctive relief embodied a compulsory counterclaim and that such claims are carved out of Section 3(b)(iv)'s exception. Assuming for the purposes of my analysis that Section 3(b)(iv) mandates advancement for compulsory counterclaims, I find that Hermelin's actions for injunctive relief are not sufficiently comparable to compulsory counterclaims to warrant advancement. The Court of Chancery Rules require a party to state in its pleading as a counterclaim any claim that that party has against the opposing party arising out of the transaction or occurrence that is the subject matter of the opposing party's claim.
This argument ignores the inherent framework within which a counterclaim becomes compulsory. Neither the Custodian of Records nor the Post-Dispatch filed a claim requiring a responsive pleading from Hermelin. Thus, there is no "subject matter of the opposing party's claim" from which Hermelin's purported compulsory counterclaim could arise.
I find it clear, however, that Section 3(b)(iv) covers and proscribes indemnification for such claims. Hermelin's abstract construction of "compulsory counterclaim" is simply unsupported by the contractual language, and the case law he cites does not support an extension of that term's definition beyond its definition in the Court of Chancery and Federal Rules. Because Section 3(b)(iv) covers Hermelin's claim for injunctive relief, he was required to obtain permission from KV's Board to pursue that action in order to receive advancement. Hermelin requested such permission and did not receive it; accordingly, his claim for advancement for the Jail Records Matter is denied.
Having determined that Hermelin is precluded by Section 3(b)(iv) from receiving advancement for the Jail Records Matter, Hermelin will ultimately be required to reimburse KV for any advancements made by KV to Hermelin for the prosecution of the Jail Records Matter portion of Count I of the Complaint. I leave it to the parties to reach an agreement as to what portion of the fees for fees advanced thus far, if any, covered the prosecution of Hermelin's attempted enforcement of his advancement right for the Jail Records Matter. If the parties are unable to resolve this issue, they should so notify me.
Hermelin seeks mandatory indemnification for the Criminal Matter, the HHS Exclusion Matter, and the FDA Consent Decree Matter. As discussed below, the central issue for mandatory indemnification is whether Hermelin was "successful on the merits or otherwise" in those matters. I find that Hermelin was successful only as to the FDA Consent Decree Matter, for which he is entitled to mandatory indemnification. For the remaining two matters—the Criminal Matter and the HHS Exclusion Matter—as well as the Audit Committee Matter (for which Hermelin does not seek mandatory indemnification), Hermelin may be entitled to permissive indemnification; however, as I discuss later in this Opinion, I cannot reach a determination on that issue on the present record.
Section 145 of the DGCL generally empowers corporations with the discretion to determine when to advance expenses to or indemnify a corporate officer or director. Nonetheless, Section 145(c) of the DGCL mandates indemnification where "a present or former director or officer of a corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding"
Section 5 of the Indemnification Agreement, entitled "Indemnification for Expenses for Successful Party," also tracks the language of DGCL § 145(c) and Article IX, Section 1(c), of KV's Bylaws:
For the purposes of this proceeding, the parties do not dispute that the three matters for which Hermelin seeks mandatory indemnification are covered "Proceedings." The key issue for mandatory indemnification under the DGCL, KV's Bylaws, and the Indemnification Agreement, is therefore whether Hermelin was "successful on the merits or otherwise" in these matters. If Hermelin was not "successful on the merits or otherwise," he will still be entitled to indemnification unless KV can show that his conduct underlying the matters for which he seeks indemnification does not satisfy the good faith standard required by DGCL § 145(a).
The Indemnification Agreement provides additional clarification of the phrase "success on the merits or otherwise." Section 7(e)(iii) of the Agreement states:
The parties disagree on how closely a court must scrutinize the outcome of a proceeding to determine whether the indemnitee was successful under Section 145(c). Both parties argue, in the first instance, that Hermelin's success or failure can be determined solely from the outcomes that occurred in each proceeding. The parties contend in the alternative, however, that should I disagree with their respective positions on Hermelin's success or failure, I must allow additional discovery into the underlying facts of Hermelin's guilty plea in the Criminal Matter, the purpose of the FDA Consent Decree, and the negotiations behind the HHS Exclusion. KV even asserts that "whether the relevant governmental entity believed or intended Mr. Hermelin to be successful in the final results of each of those proceedings" should factor into my analysis.
Such facts are beyond the scope of the inquiry required by Section 145(c). When determining success on the merits, this Court does not look "behind the result."
It is clear that Hermelin was not successful in the Criminal Matter. The USAO charged Hermelin with two federal strict liability misdemeanors, and Hermelin pled guilty to both charges.
It is well-settled that, in a criminal proceeding, anything less than a conviction constitutes "success" for the purposes of DGCL § 145(c).
Additionally, I find Hermelin's invocation of Section 7(e)(iii) to be unpersuasive. That provision states that a disposition short of final judgment may be successful in some circumstances. Section 7(e)(iii) is a reflection of established Delaware precedent that "success" under DGCL § 145(c) "does not mean moral exoneration. Escape from adverse judgment or other detriment, for whatever reason, is determinative."
Hermelin is unsuccessful in drawing a parallel between his case and Merritt-Chapman. Unlike the indemnitees in Merritt-Chapman, Hermelin did not achieve the dismissal of some charges against him for the price of pleading guilty to other charges. Rather, Hermelin was charged with two strict liability misdemeanors, and he pled guilty to both charges. Hermelin insists that the USAO could have charged him with more serious crimes, an assertion he bases on the charges leveled against ETHEX, but that due to successful negotiations between Hermelin's counsel and the USAO, the USAO only charged Hermelin with two misdemeanors. The substance of these negotiations, if in fact they occurred, is beyond the scope of a determination of success on the merits under Section 145(c). Just as this Court will not look behind the result of a dismissal, it will not judge the actual outcome of a proceeding against the universe of crimes with which the indemnitee could have been charged. The proper analysis instead considers the outcome achieved by the indemnitee in light of the formal charges or claims against him.
In the criminal context, the dismissal of a charge equates with success in most instances, while a conviction (including a conviction resulting from a plea of guilty or nolo contendere) equates with failure. Here, Hermelin pled guilty to all charged offenses, paid a large fine, and received a jail sentence. Although by pleading guilty Hermelin conceivably avoided some "expense, delay, distraction, disruption, [or] uncertainty," he cannot be said to have "succeeded" simply because of that fact. If an indemnitee could "succeed" by pleading guilty on all counts, those indemnitees utterly without a defense to any charge would nonetheless be "successful" on the merits, thus circumventing the permissive indemnification provisions of DGCL §§ 145(a)-(b). Hermelin did not achieve success on any of the charges against him, and for that reason, he is not entitled to mandatory indemnification for the Criminal Matter.
Hermelin also did not succeed on the merits in the HHS Exclusion Matter. In a May 19, 2010, letter, the OIG informed Hermelin that it was considering excluding him from federal healthcare programs, and the OIG invited him to submit information in his defense.
Hermelin nonetheless contends that he was successful on the merits because the OIG's determination did not require Hermelin to make any payment. Additionally, Hermelin argues that he entered into the settlement agreement with the OIG to prevent the exclusion of KV, and that because of this it would be inequitable to find that by doing so he forfeited his right to mandatory indemnification. Finally, Hermelin asserts that his settlement with the OIG, in which he purportedly gave up his right to appeal his exclusion in return for the OIG's agreement not to exclude KV, allowed Hermelin to "avoid expense, delay, distraction, disruption, and uncertainty," and thus the settlement was the type of "disposition short of final judgment" for which the Indemnification Agreement mandates indemnification.
All of these arguments attempt to sidestep what is in actuality a very simple inquiry: in the proceeding in which the OIG threatened Hermelin with exclusion from federal healthcare programs, did Hermelin "succeed" when the OIG decided to exclude him for twenty years (effectively, for life)? It is clear that he did not. Moreover, I find irrelevant the fact that Hermelin purportedly gave up his right to appeal his exclusion and divested himself of his KV stock in return for the OIG's promise not to exercise permissive exclusion of KV. Hermelin argues that equity should mandate indemnification in this context, but his right to indemnification, if it exists, arises from statute and contract, not equity.
Admittedly, although the divestiture of Hermelin's ownership in KV appears to have been necessary to avoid the mandatory exclusion of KV, the record also provides some support for the inference that the OIG sought a waiver of Hermelin's right to appeal his exclusion only in exchange for its promise not to permissively exclude KV. Furthermore, good corporate policy may support the indemnification of officers who, in good faith, "take one for the company" to avoid bringing down the whole enterprise. My task here, however, is not to pass judgment on KV's corporate policy, but rather to determine, as a matter of law, whether Hermelin is entitled to statutorily-mandated indemnification on the basis of his having "succeeded on the merits." That determination is limited to the action the OIG took against Hermelin and the outcome of that action. It is clear from the timing and content of the letters from the OIG to Hermelin that the OIG's plan to exclude Hermelin was independent of any action it took toward KV. Thus, Hermelin's voluntary agreement to undergo additional hardship to protect KV is irrelevant. Even if such an agreement were relevant to my analysis, and regardless of what sound corporate policy may dictate, "taking one for the team" and "falling on one's sword" do not equate to "success on the merits or otherwise" for the indemnitee. On the contrary, it is the company that "succeeds" in such an instance, albeit at the indemnitee's expense. Whether the company chooses to indemnify its officer in such cases is a matter of corporate policy, and DGCL §§ 145(a)-(b) authorize corporations to establish that policy should they so desire.
I find that Hermelin was "successful on the merits or otherwise" with respect to the FDA Consent Decree Matter. As discussed above, in determining "success" for the purposes of Section 145(c), I compare the charges Hermelin faced with the outcome he achieved, and I do not look "behind the result." In essence, the Consent Decree imposed no new restrictions, obligations, or penalties against Hermelin, and thus, in avoiding an adverse result, Hermelin achieved "success."
The FDA's Complaint for Permanent Injunction sought an injunction generally prohibiting KV, ETHEX, Hermelin, and other defendants from manufacturing, holding, or distributing any drug until the defendants brought their operations into conformity with cGMP and the FDCA.
KV mischaracterizes Paragraph 24 of the Consent Decree as imposing a "perpetual ban" on Hermelin from any management or operational role in KV.
The parties disagree on what evidence is relevant to a good faith analysis under Section 145(a) and have briefed the issue. In the interests of efficiency, I address the matter here. Where a corporate officer or director is not "successful on the merits or otherwise," Sections 145(a) and (b) of the DGCL permit a corporation to indemnify that person so long as "the person acted in good faith and in a manner the person reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe the person's conduct was unlawful."
While statutorily mandated indemnification looks only to "success on the merits or otherwise" and can usually be determined based on the relevant court documents of the underlying action, statutorily permissive indemnification requires a determination as to whether Hermelin acted in good faith with respect to his conduct that led to the underlying action. The latter determination requires additional discovery to supplement the present record of this case, and I now address the scope of evidence relevant to the issue of Hermelin's good faith.
Based on the briefs submitted by the parties and my own research, no Delaware case has squarely addressed what evidence is relevant to an inquiry into whether an indemnitee acted in good faith for the purposes of permissive indemnification under DGCL §§ 145(a) and (b).
This provision clearly establishes that the particular outcome of a proceeding does not itself create a presumption that the indemnitee had a "non-indemnifiable state of mind."
Beyond these basic formulations, there is a dearth of case law addressing the scope of relevant evidence with respect to good faith under Section 145(a). In Stockman v. Heartland Industrial Partners, L.P., then-Vice Chancellor Strine acknowledged that
The third situation, settlement with a payment, is more problematic, as a settled case will rarely contain "a judicial record developed in a plenary proceeding." Thus, additional discovery—in some instances mimicking the very litigation avoided by the settlement—may be required to permit a determination on whether the indemnitee acted in good faith. As the Stockman Court noted, however, "there has been precious little application of the §§ 145(a) and (b) standard" in the case of settlements "because indemnitees typically work with the corporation, its lawyers, and insurers in resolving cases."
The matters for which Hermelin seeks indemnification present similar challenges, as none of the matters contained a finding that Hermelin acted in bad faith or an admission of culpability by Hermelin. The Criminal Matter resulted in a guilty plea to two strict liability misdemeanors. Given the lack of culpability inherent in a guilty plea to a strict liability offense, and since Section 7(e)(iii) of the Indemnification Agreement precludes such a plea from creating, of itself, a presumption that Hermelin had a non-indemnifiable state of mind, the record is inadequate with respect to Hermelin's conduct underlying the Criminal Matter. The HHS Exclusion Matter similarly did not contain a finding that Hermelin acted in bad faith; rather, Hermelin's exclusion was based on his association with ETHEX. Finally, in regards to the Audit Committee Matter, although KV's Board's decision to terminate Hermelin's employment "for cause" was allegedly based on Hermelin's willful misconduct, the current record contains scant evidence in support of that allegation; thus, the parties must supplement the record before I can make a determination under Section 145(a).
I find that a plenary trial is required on the issue of whether Hermelin "acted in good faith and in a manner [he] reasonably believed to be in or not opposed to the best interests of [KV], and, with respect to any criminal action or proceeding, had no reasonable cause to believe [his] conduct was unlawful."
Facts unrelated to the aforementioned activities are outside the scope of relevant evidence. This should be fairly straightforward for the Criminal Matter and the HHS Exclusion Matter, as the relevant facts are those related to the formal charges and allegations made against Hermelin in those matters. In a consistent fashion, I limit discovery into the Audit Committee Matter to facts related to Hermelin's conduct underlying the Audit Committee's investigation and KV's Board's decision with respect to Hermelin's employment. Presumably there will be substantial overlap between Hermelin's conduct underlying the Criminal and HHS Exclusion Matters and the complaints made by KV or ETHEX employees to KV's Board, as those complaints purportedly focused on Hermelin's failure to respond appropriately to KV's manufacturing of oversized tablets, which of course brought about the Criminal and HHS Exclusion Matters. It appears, however, that the Audit Committee based its decision to terminate Hermelin's employment on additional misconduct by Hermelin, such as past confrontations with the FDA.
In limning the relevancy issues as I have, I reject Hermelin's argument that discovery on the issue of good faith should be limited to the records established in the matters for which he seeks indemnification. Hermelin's suggested scope, which he generally limits to the papers and transcripts filed in the underlying proceedings, more closely resembles what this Court will consider in determining "success on the merits or otherwise" under Section 145(c). Unlike Section 145(c), Section 145(a) requires a finding that the indemnitee did not act in bad faith, a fact-intensive inquiry that will most likely require a trial and credibility determinations. The disparity between the relevant evidence, respectively, under Sections 145(a) and (c) is, of course, the reason I decided to resolve issues of mandatory indemnification in a summary fashion.
Moreover, the cases Hermelin cites do not support his argument for limited discovery. To be sure, Stockman found that "a judicial record developed in a plenary proceeding . . . can serve as a basis for evaluating whether the indemnitee met the §§ 145(a) and (b) standard for good faith and law compliance."
For the foregoing reasons, I find that the Plaintiff is not entitled to advancement for the Jail Records Matter; is not entitled to mandatory indemnification for the Criminal Matter or the HHS Exclusion Matter; is entitled to mandatory indemnification for the FDA Consent Decree Matter; and that the evidence relevant to the Plaintiff's claims for permissive indemnification is limited to the Plaintiff's conduct, and the facts related to that conduct, underlying the proceedings for which indemnification is sought.
Although I rule in favor of KV on most of the indemnification and advancement issues, it strikes me that it is KV who has won what may prove a Pyrrhic victory. As I have discussed above, there is limited Delaware case law addressing what evidence is relevant to the standard of conduct requirement in DGCL § 145(a). I suspect that this lack of case law is owed less to the fact that companies never face claims for permissive indemnification and more to the fact that, where, as here, it is clear that the employee's right to indemnification turns on "good faith," economics militate in favor of resolving the matter outside of court, given the costs associated with a plenary trial on the indemnitee's conduct.
If the parties wish, they can certainly conduct discovery and present evidence at trial on the issue of good faith. To be sure, we will essentially be conducting the litigation the parties havef thus far avoided through settlements, consent decrees, and plea agreements. I leave it to the parties to determine whether the elusive joys and potential benefits of such litigation outweigh the substantial costs that will result.
Counsel shall confer and submit a form of order consistent with this Opinion.
Hermelin's predicament, as it were, was instead a "Morton's Fork": a choice between two equally undesirable alternatives. The Morton's Fork gets its name from John Morton, the Archbishop of Canterbury and later Lord Chancellor under Henry VII. Morton justified taxing the rich as well as the poor on the grounds that subjects living in opulence could clearly afford to give generously, and subjects living frugally clearly had amassed savings and could thus give generously.
Neither a Hobson's Choice nor a Morton's Fork should be confused with a "Catch-22," see JOSEPH HELLER, CATCH-22, at 45-46 (Simon & Schuster paperback ed. 2004) (describing a rule whereby a combat pilot declared insane by evaluation would be grounded, but the pilot must have requested the evaluation, and requests for evaluations were conclusive evidence of sanity because "[a]nybody who wants to get out of combat duty isn't really crazy"), or "Buridan's Ass," which satirizes moral determinism by hypothesizing an ass placed precisely between a stack of hay and a pail of water, where the ass, which is presumed to go to whichever is closer, cannot make a rational choice and thus dies of both starvation and dehydration.
Indemnification Agreement § 1(g). The parties do not dispute that any of the matters for which Hermelin seeks indemnification are "Proceedings" under the Indemnification Agreement. Rather, the parties dispute whether Hermelin initiated the Jail Records Matter, for which he seeks advancement.
Id. § 1(f).
Ch. Ct. R. 26(b)(1) (emphasis added). Here, I address the scope of evidence "relevant to the subject matter involved in the pending action," i.e, Hermelin's good faith or lack thereof.
Maiss v. Bally Gaming Int'l, Inc., 1996 WL 288290, at *2 (E.D. La. May 29, 1996) (emphasis added) (citation omitted).