Ping4, Inc. v. 1st Works Corp.

Full title: Ping4, Inc. v. 1st Works Corporation, Nigel R. Spicer, and Richard A…

Court: States of New Hampshire MERRIMACK, SS SUPERIOR COURT

Date published: Oct 23, 2012

NO. 2012-CV-499 (N.H. Super. Oct. 23, 2012)

Opinion

NO. 2012-CV-499

10-23-2012

Ping4, Inc. v. 1st Works Corporation, Nigel R. Spicer, and Richard A. Gorgens

Richard B. McNamara

ORDER

Ping4, Inc. ("Ping") has sued 1st Works Corporation ("1st Works"), Nigel R. Spicer ("Spicer"), and Richard A. Gorgens ("Gorgens") (together "Defendants"), alleging that because of improper actions of Spicer, Gorgens, and 1st Works, a company that Spicer and Gorgens control, Ping has been injured. Ping alleges that the Defendants promised to provide software and technology suitable for the development and licensure of a system that would use smart phones for broadcasting location-based multimedia alerts and notifications to any smart phone anywhere in the world based upon user proximity to a defined event. According to Ping, the Defendants were compensated with substantial ownership of Ping but failed to deliver what was promised. Ping makes other claims, including claims that while Spicer and Gorgens were working full-time for Ping, they were secretly enhancing the growth of their company, 1st Works, to Ping's detriment. Ping seeks damages against all Defendants.

The Defendants deny Ping's claims. In addition, they bring a number of counterclaims based on Ping's failure to pay for technology that the Defendants developed and Ping's actions firing Spencer and Gorgon from Ping. They have also filed a Motion for Immediate Advancement of Litigation Costs, to which Ping has objected. For the reasons stated in this Order, the Defendants' Motion is DENIED.

I

Ping is a Delaware corporation, and the parties appear to agree that Delaware law must be applied to determine the rights of the parties. Del. Code Ann. tit. 8, sections 145 (a) and (b) give corporations the power to indemnify their current and former corporate officers from expenses occurred in legal proceedings "by reason of the fact that he . . . is or was a director, officer or employee of the Corporation." Delaware courts have stated that the purpose of indemnification agreements is to allow corporate officials to defend themselves in legal proceedings "secure in the knowledge that, if vindicated, the corporation will bear the expense of litigation." VonFeldt v. Stifel Fin. Corp., 714 A.2d 79, 84 (Del. 1998). Under the Delaware statute, however, the right to indemnification cannot be established until after the defense to legal proceedings has been "successful on the merits or otherwise." Del. Code Ann. tit. 8, § 145 (c).

Advancement is a corollary to indemnification, and is considered an inducement for attracting capable individuals into corporate service. Advancement provides corporate officials with immediate interim relief from the personal out-of-pocket financial burden of paying significant ongoing expenses inevitably involved with investigations and legal proceedings. Kaung v. Cole Nat'l Corp., 884 A.2d 500, 509-510 (Del. 2005). Del. Code Ann. tit. section 145 (e) allows corporations to advance funds to current and former corporate officials upon an express agreement by the official to repay the funds if it is determined that the former officer or director was not entitled to indemnification.

The provisions of the Code are permissive and not mandatory; the right to indemnification and advancement is determined here by Ping's Certificate of Incorporation and Bylaws.

Article 6 of Ping's Certificate of Incorporation provides in relevant part:

The Corporation shall indemnify each person who at any time is, or shall have been, a director or officer of the Corporation and was or is a party or is threatened to be made a party to any threatened, pending, or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that he or she is or was a director or officer the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee, or agent of another Corporation . . . against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement incurred in connection with any such action, suit or proceeding, to the maximum extent permitted by the General Corporation Law of the State of Delaware, as the same exists or may hereafter be amended . . . .

(Emphasis added). The Bylaws discuss advancement of expenses:

It being the intent of the corporation to provide maximum protection available under the law to its officers and directors, the corporation shall indemnify its officers and directors to the full extent the corporation is permitted or required to do so by the Delaware General Corporation Law. In furtherance of and not in limitation of the foregoing, the corporation shall advance expenses, including attorneys' fees incurred by an officer or director of the corporation in defending any civil, criminal, administrative or investigative action, suit or proceeding in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such director or officer to repay such a advances if it shall ultimately be determined that he is not entitled to be indemnified by the corporation. . . . Notwithstanding the foregoing, the Corporation shall not be required to indemnify or advance expenses to any person in connection with any action, suit, proceeding, claim or counterclaim initiated by or on behalf of such person.

¶ 10.1 (emphasis added).

Under Delaware law, certificates of incorporation are not only contracts among a corporation and its shareholders, but also are contracts among the shareholders. In re Explorer Pipeline Co., 781 A.2d 705, 713 (Del. Ch. 2001). Thus, Delaware courts employ general principles of contract interpretation in construing certificates of incorporation. Hibbert v. Hollywood Park, Inc, 457 A.2d 339, 342-43 (Del. 1983). The contractual rights of the stockholders of the corporation are subject to the provisions of the Delaware General Corporation Law. Berlin v. Emerald Partners, 552 A.2d 482, 488 (Del. 1989).

Delaware courts first review the language of the contract to determine if the intent of the parties can be ascertained from the express words chosen by the parties or whether the terms of the contract are ambiguous. Unless the contract language is ambiguous, extrinsic evidence may not be used to interpret the intent of the parties, to vary the terms of the contract or to create an ambiguity. In re Explorer Pipeline Co., 781 A.2d at 714. A Delaware court will not conclude that a contract is ambiguous unless it is "reasonably or fairly susceptible of different interpretations or may have two or more different meanings. Id. A court must construe the contract—in this case the certificate of incorporation—as a whole, to reconcile all of its provisions, if possible. Id. at 713-714.

The Delaware Supreme Court has stated that:

Following those rules, if the bylaw is unambiguous in its language, we do not proceed to interpret it or to search for the parties' intent behind the bylaw. We only construe the bylaw as it is written, and we give language which is clear, simple, and unambiguous the force and effect required.

Hibbert, 457 A.2d at 343 (citations omitted).

II

By letter dated June 18, 2012, Spicer and Gorgens made a demand for advancement of their costs of defense of the litigation Ping instituted against them on the grounds that they had been directors and officers of the Corporation. The demand letter recites that it was made pursuant to Article 6 of the Amended Certificate of Incorporation of Ping, and Section 10 of the Ping Bylaws. It stated that Gorgens and Spicer confirmed that they undertake to repay any advances if it should be ultimately determined that they are not entitled to indemnity.

By letter dated June 22, 2012 Ping denied the request for indemnification. Ping argues that an advancement of fees and expenses only applies to current officers and directors. As former directors and officers, Ping reasoned that Spicer and Gorgens were not entitled to advancement. In making this argument, Ping relies entirely on its reading of the corporate documents, which it says only provide advancement rights to current officers and directors. Although the Articles of Incorporation discuss indemnification of current and former directors and officers, the Bylaws discuss indemnification and advancement only with respect to current directors and officers. Ping supposes that the distinction is based upon the corporation's "special interest" in those currently working for it. Ping's Obj. Defs.' Mot. for Advancement of Fees and Expenses, 8.

Delaware corporate law does not require either indemnification or advancement; but permits both. In both its Bylaws and the Articles of Incorporation, Ping expresses its intent to indemnify to the extent permitted by the Delaware General Corporation Law. The reason for doing so is well expressed by the Delaware Supreme Court; "[i]ndemnification encourages corporate service by capable individuals by protecting their personal financial resources from depletion by the expenses they incur during an investigation or litigation that results by reason of that service." Homestore, Inc. v. Tafeen, 888 A.2d 204, 211 (Del. 2005).

However, Del. Code Ann. tit. 8, section 145 (e) specifically distinguishes between current and former directors and officers of corporations:

Expenses (including attorneys' fees) incurred by an officer or director in defending any civil, criminal, administrative or investigate of action, suit or proceeding may be paid by the corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such director or officer to repay such amount if it shall ultimately be determined that such person is not entitled to be indemnified by the Corporation as authorized in this section. Such expenses (including attorneys fees) incurred by former directors and officers or other employees and agents may be so paid upon such terms and conditions, if any, as the corporation deems appropriate.

(Emphasis added).

The Court finds significant the fact that the Delaware legislature distinguished between current directors and officers and former directors and officers in the statute allowing for advancement. A similar distinction is made by the Bylaws, relating to advancement in this case. Literally read, paragraph 10 of the Bylaws requires advancement of expenses only for current directors and officers, even though section six of the Articles of Incorporation, relating to indemnification, does not distinguish between current and former directors and officers. Defendants do not argue that the Bylaws are ambiguous, and there is nothing in the Delaware General Corporation Law to suggest that it is. Similarly, Defendants do not argue that a corporation could not make the decision to treat current and former directors and officers differently under Delaware law.

Under these circumstances, the Court cannot find that the Bylaws require the corporation to advance litigation costs to former directors and officers. It follows that the Defendants' Motion must be DENIED.

SO ORDERED.

________________

Richard B. McNamara,

Presiding Justice
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