In a recent decision, the Delaware Chancery Court required a Delaware corporation to advance a former director’s costs of defending against a Securities and Exchange Commission insider trading lawsuit, despite the director’s guilty plea in a related criminal case.1 The Chancery Court’s decision in Holley v. Nipro Diagnostics is a reminder that the Chancery Court will strictly enforce Delaware corporations’ advancement obligations, even in cases involving admitted misconduct by the party seeking advancement. The decision also highlights the important distinction between a corporation’s indemnification obligations (the ultimate obligation to bear certain defense costs) and its advancement obligations (the obligation to pay certain defense costs as they are incurred subject to repayment if the defendant is ultimately found not to be entitled to indemnification).
While an individual’s right to indemnification for defense costs typically cannot be determined until after a claim is resolved, Delaware law broadly permits—but does not require—corporations to pay defense costs in advance, subject to an undertaking from the defendant officer or director to repay any amounts advanced if it is ultimately determined that the officer or director was not entitled to indemnification.
