The Delaware Court of Chancery has denied a request for “fees on fees” in a case involving Tula Health, Inc. The plaintiffs, former officers and directors, sought to recover the costs of their legal battle to get Tula Health to cover their legal expenses in an unrelated Utah lawsuit. The court’s decision hinged on whether Tula Health had *wrongfully* withheld advancement of these fees, a key factor in Delaware law regarding such matters.
The Background of the Case
The plaintiffs, David Derrick, Doug Haymore, and Jeffrey Peterson, were sued in Utah (the “Utah Proceeding”). They argued that Tula Health was obligated to cover their legal fees because they were sued in their capacities as former officers, directors, and agents of the company. Their claim was based on Tula Health’s certificate of incorporation (COI) and bylaws. The COI stated the company would indemnify and advance expenses to its officers and directors, while the bylaws outlined the process for such advancements.
The Plaintiffs’ Demands and the Company’s Response
The plaintiffs initially made two demands for advancement of fees based on certain indemnification agreements. Tula Health, however, refused to pay, taking the position that those agreements were unenforceable under Utah law.
Later, the plaintiffs made a third demand, this time citing the bylaws and providing the necessary undertakings. This was followed by the filing of the Delaware lawsuit the very next day.
The Court’s Reasoning
The Court of Chancery, after reviewing the case, found that the plaintiffs were not entitled to “fees on fees.” The court acknowledged that Tula Health’s COI and bylaws did provide for advancement. However, the court found that Tula Health had not *wrongfully* withheld advancement.
The court noted that the plaintiffs’ initial demands were based on the separate indemnification agreements, not the COI or bylaws. The first time the plaintiffs cited the bylaws was in their third demand, a mere 24 hours before filing the Delaware lawsuit. The court found that Tula Health’s initial refusal to pay was based on the indemnification agreements, which were separate from the COI and bylaws.
The court also dismissed the plaintiffs’ argument that Tula Health’s response to the initial demands indicated they would not honor advancement under the COI or bylaws.
In its order, the court stated, “Because the Defendant did not force this litigation, nor did it wrongfully withhold advancement, the request for fees on fees must be denied.”
The Significance of the Decision
This case highlights a key aspect of Delaware law on advancement of fees and “fees on fees.” For a plaintiff to successfully claim “fees on fees,” they must demonstrate that the company *wrongfully* withheld advancement, forcing them to litigate their right to those funds.
The court emphasized that the company had not wrongfully withheld advancement, as the plaintiffs’ initial demands were based on different agreements than those that formed the basis of their claim for advancement.
The court also pointed out that the company quickly agreed to advancement once the proper demand under the bylaws was made. The ruling underscores the importance of proper procedure and timing when seeking advancement of legal fees, particularly in the context of corporate governance.