In Rhodes v. Biomerieux Inc. 2024 BL 52954, Del. Ch., No. 2023-1079,[1] the Delaware Chancery Court held that bioMérieux, Inc. (bMx) must advance certain litigation-related expenses to Mr. Paul Rhodes, the former CEO of Specific Diagnostics LLC (Specific, collectively with bMx, the Defendants). bMx acquired Specific in May 2022, thereby also assuming certain of Specific’s indemnification obligations.
The question before the Court was whether the Defendants had to advance Rhodes’ litigation expenses in connection with two separate actions: (i) one filed by Rhodes seeking a declaration that he did not commit fraud (Plaintiff’s Superior Court Action) and (ii) the second, filed by the Defendants asserting claims against Rhodes, including fraud, fraudulent inducement, fraudulent concealment, and unjust enrichment (Defendants’ Superior Court Action).
The Chancery Court found that, pursuant to Specific’s bylaws and indemnification agreement, Rhodes was entitled to advancement in connection with Defendants’ Superior Court Action but not Plaintiff’s Superior Court Action.
The core controversy stems from a False Claims Act investigation, which, bMx has alleged, pre-dated its acquisition of Specific but that Rhodes, the target company co-founder and former CEO, failed to disclose, thereby breaching merger representations. Specific is a Delaware corporation focused on “developing a rapid test to determine the most effective antibiotic to prescribe for blood infections.” Rhodes also controlled an additional entity, iSense LLC (iSense), which cross-licensed certain intellectual property to Specific. In December 2021, the United States Attorney’s Office for the Northern District of California (USAO) issued Civil Investigative Demands (CIDs) to iSense and Specific as part of a False Claims Act investigation. Rhodes contends that the CIDs were issued only in connection with iSense, not Specific.
On April 11, 2022, bMx agreed to acquire Specific. The merger agreement specified that bMx and its acquisition subsidiary agreed to “assume and honor” Specific’s indemnification and advancement obligations to its directors and officers. The Defendants allege that they only learned of the USAO investigation three months after the merger closed and thus sought to recover from Rhodes a portion of the associated $10 million settlement, leading to both Plaintiff’s Superior Court Action and Defendants’ Superior Court Action. In the present matter before the Court, Rhodes sought summary judgment on his claims for advancement and fees-on-fees in connection with both actions. The Court analyzed each in turn, focusing on Specific’s bylaws and indemnification agreement in assessing Rhodes’ advancement entitlements.
With respect to Plaintiff’s Superior Court Action, the court determined that Rhodes was not entitled to advancement due to “carve-outs” in the bylaws and indemnification agreement regarding proceedings “initiated” by an executive unless “the proceeding was authorized by the Board of Directors of the corporation.” The Court further found that Rhodes was not entitled to advancement even if the Plaintiff’s Superior Court Action was filed defensively rather than offensively.
With respect to the Defendants’ Superior Court Action, however, the Court found that Rhodes was entitled to advancement. The Court made its determination based on a bylaws provision stating that “[t]he corporation will advance to any person who 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 such person is or was a director or executive officer of the corporation.” Similar language appears in the indemnification agreement. Correspondingly, because the Defendants’ Superior Court Action concerned Rhodes by “reason of the fact” that he was an executive officer of the company, he was entitled to advancement.
In finding that a company executive may be entitled to advancement in one of two related legal actions, the case reiterates the emphasis that courts generally, and perhaps the Chancery Court in particular, place on the language of company bylaws and transaction agreements—reiterating the importance of precise drafting for determining parties’ rights and obligations.
[1] https://courts.delaware.gov/Opinions/Download.aspx?id=360260