The following is a reposting of the “Fee on Fee” Awards: Wong v. USES Holding Corp., written by Brett M. Amron, Development Chair of the D&O Liability Committee for the Business Law section of the ABA.
Generally, a successful claim for advancement entitles the prevailing party to be indemnified for the fees expended in contesting a corporation’s wrongful rejection of a demand for advancement. Recently, in Wong v. USES Holding Corp., No. 11475, 2016 WL 1436594 (Del. Ch. Apr. 5, 2016), the Delaware Court of Chancery addressed the issue of when a claimant’ entitlement to these “fees on fees” begins to accrue.
The plaintiffs in Wong, a former director and a former officer of the defendant corporation, were seeking advancement of legal fees incurred in defending a New York action challenging their conduct in the sale of USES to its current owner. When USES informed them that it would not be advancing their defense costs, the plaintiffs brought suit to enforce their right to advancement.
Eventually, the parties agreed in a stipulated order that the plaintiffs were, in fact, entitled to advancement of their fees incurred in defending the underlying New York action. They disagreed, however, as to whether the plaintiffs were also entitled to recover the fees expended in bringing the advancement action. The plaintiffs argued that they were entitled to an award of their “fees on fees,” which started to accrue on and after July 17, 2015 the day the underlying action was filed. According to the plaintiffs, July 17 was the date on which their rights to mandatory advancement were first violated. USES argued that the plaintiffs were not entitled to “fees on fees” at all.
The court ultimately held that the plaintiffs were entitled to indemnification of their “fees on fees,” but only with respect to fees that were incurred on and after November 25, 2015, the date on which the plaintiffs first submitted a request for advancement that included an undertaking to repay the amounts so advanced in the event that it was later determined that they were not entitled to indemnification. In reaching this decision, the court explained that, because the relevant advancement provision required the defendants to submit such an undertaking to perfect their advancement rights, USES was under no legal obligation to advance the plaintiffs’ fees until after they had submitted advancement requests that included the requisite undertaking. As USES had no obligations under the advancement provision until after the plaintiffs’ had satisfied the undertaking condition giving rise to their advancement rights, USES was not required to indemnify the plaintiffs’ for “fees on fees” prior to that time.
The Wong opinion highlights the need for the officers, directors and other parties seeking rights to advancement and indemnification under the organizational documents of the indemnifying party or under a separate agreement to review carefully the provisions establishing such rights, both at the time those rights, both at the time those rights are initially extended and at the time, if any, they are asserted.