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Words Matter: Chancery Court Holds that Indemnification Provision in Equity Purchase Agreement Does Not Cover Advancement of Expenses for Officer Conduct Unauthorized by the Board

In Computer Science Corporation v. Eric Pulier, et al., C.A. No. 11011-CB (Del. Ch. June 27, 2019), the Delaware Court of Chancery denied Plaintiff Computer Sciences Corporation’s (“CSC”) motion for partial summary judgement seeking to recover a portion of funds advanced to a former officer of ServiceMesh, Inc. (an entity CSC had acquired) for legal expenses incurred in defending a separate action. The Court held that based on its interpretation of the plain language of the indemnification provision in the relevant acquisition agreement that the indemnification provision was not broad enough to encompass the advancement of legal expenses in question.

This litigation arises from the CSC’s November 2013 acquisition of ServiceMesh, Inc. (“ServiceMesh”). The acquisition was consummated in accordance with the terms of an Equity Purchaser Agreement (the “EPA”) which provided that the former equityholders of ServiceMesh would receive, in addition to a cash payment as consideration, they would also be paid an earnout payment based on the revenue generated by ServiceMesh between January 1, 2013 and January 1, 2014. In accordance with the EPA, the equityholders agreed to indemnify and hold CSC and ServiceMesh harmless for losses related to the authorization and approval by the ServiceMesh board of directors of the EPA and transactions contemplated by the EPA.

On May 12, 2015, CSC filed this action against Eric Pulier, founder and former Chief Executive Officer of ServiceMesh, and Shareholder Representative Services LLC (“SRS”) alleging that Pulier, acting on behalf of ServiceMesh, bribed executives at Commonwealth Bank of Australia Limited to enter into contracts with ServiceMesh in order to artificially inflate ServiceMesh’s revenue during the relevant period and result in payment of the earn out. In a separate action, Pulier sought advancement from CSC and Service Mesh for expenses incurred defending this action. That court found that Pulier was entitled to advancement from ServiceMesh, but not CSC, for certain claims under ServiceMesh’s bylaws and Pulier’s indemnification agreement.

The partial summary judgment motion before the Court pertained to Count IX of the complaint in which CSC was seeking to recover a portion of the over $18 million it advanced Pulier on behalf of ServiceMesh for legal expenses. CSC contended that it was entitled to indemnification as a matter of law for a portion of the amounts advanced to Pulier under the above referenced indemnification provision of the EPA. Construing the provision strictly, the Court held that the advancement obligations at hand were not covered by the indemnification provision because while the advancement claims were related to the EPA or its related transactions, it did not relate to the Board’s approval of the EPA or its related transactions. The Court noted that to interpret the language as CSC’s contended would be to render the words “authorized and approved” and “by the Board of Directors” meaningless. Further, the Court emphasized that because the conduct that gave rise to the claims for advancement involved a secret illegal bribery scheme, CSC did not, and could not, contend that the side agreement alleged to constitute bribery was authorized by ServiceMesh’s Board or that it was contemplated by the EPA. For these reasons, the Court held that the indemnification obligation of the EPA was not triggered and denied the motion for partial summary judgment.

Copyright 2019 K & L Gates

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About this Author

Annette E. Becker, Practice Area Leader, Corporate Lawyer, Securities Compliance Attorney
Practice Area Leader – Corporate & Transactional

Annette Becker has over 20 years experience practicing corporate law with an emphasis on U.S. and cross border mergers and acquisitions for emerging, middle market, and Fortune 500 companies. Ms. Becker advises her company clients and their boards as to corporate governance issues and general corporate matters. Ms. Becker’s transactional experience also includes joint ventures and other complex strategic relationships, securities offerings and securities compliance issues, strategic and venture capital investments, financing transactions, recapitalizations and...

206-370-8340
Adrienne Wimberly, KL Gates Law Firm, Pittsburgh, Corporate Law Attorney
Associate

Adrienne Wimberly is an associate at the firm’s Pittsburgh office. She is a member of the emerging growth and venture capital practice group.

412-355-6365