Del Ch. Issues Novel Ruling on D&O Advancement

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By Michael Greene

July 31 — Resolving an “unusual” issue, the Delaware Chancery Court ruled July 30 that two former directors and officers' claims for an advancement of legal expenses were not entitled to receive priority treatment as administrative expenses of a receivership.

Vice Chancellor Donald F. Parsons Jr. held that the advancement claims of the ex-Silicon Valley Innovation Co. LLC officers “should be treated on par with the claims of other unsecured creditors and paid pro rata.”

Noting the absence of controlling Delaware decisions on this issue and that the state's statutes on receivership provide minimal guidance, the court attempted to reconcile the state's strong policy in favor of advancement and relevant bankruptcy case law, which did not support treating the claims with administrative priority.

Despite this tension, the court found several reasons for treating the claims the same as those of unsecured creditors, including that the plaintiffs' claims “seriously could undermine, if not entirely eliminate, the ability of companies in receivership to pursue claims against former management.” The court also noted that the policy behind advancement, to attract qualified individuals to management posts, is not served in the receivership context—where the focus is on winding up the entity's affairs.

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