Advance the Rupees, Please: Sutherland Global Holdings Must Advance Former-Director’s Legal Fees Related to Failed Land Deal in India

By: Joanna Diakos Kordalis and Jonathan Miner

In Narayanan v. Sutherland Global Holdings C.A. No. 11757-VCMR (Del. Ch. July 5, 2016), Vice Chancellor Montgomery-Reeves of the Delaware Chancery Court held, in a post-trial opinion, that the bylaws of Sutherland Global Holdings, Inc. (“Sutherland”) and an indemnification agreement between Sutherland and Plaintiff Muthu Narayanan (“Plaintiff”) are disjunctive and must be read separately, allowing Plaintiff to prevail on his claim for advancement of legal fees and expenses.

The Plaintiff in Narayanan served as a director and officer of Sutherland’s India subsidiary as well as the director of two additional companies, one owned by the subsidiary and the other owned by Sutherland’s chairman, chief executive officer, and controlling stockholder. The additional entities were formed to acquire and develop land in India. The Plaintiff oversaw the advancement of millions of dollars to two land aggregators for the purpose of acquiring land on behalf of each entity. The land development projects did not go well and ultimately resulted in one of the two land aggregators going to jail on conspiracy charges (the “India Land Deals”). Thereafter, the controlling stockholder started an internal investigation into the India Land Deals.

Two years later, Plaintiff sought to retire and exercise his Sutherland stock options, but the controlling stockholder refused because Sutherland had not recovered the money it advanced to the land aggregators in the India Land Deals. Unable to recover payment for his exercised shares, Plaintiff sued Sutherland in the U.S. District Court for the Western District of New York (the “New York Action”). Sutherland filed a counterclaim in the New York Action, alleging that Plaintiff breached his fiduciary duties in connection with the India Land Deals and had not adequately cooperated with the internal investigation. Sutherland also asserted a setoff defense claiming that Plaintiff’s breaches of fiduciary duties regarding the India Land Deals resulted in damages suffered by Sutherland in excess of the amount that the Plaintiff was seeking to recover from Sutherland. Sutherland’s controlling stockholder also initiated two criminal complaints to be filed against Plaintiff in India alleging similar claims (the “India Criminal Actions”). Plaintiff filed this case in Delaware Chancery Court seeking advancement of his legal fees and expenses to defend against the New York setoff defense and counterclaim and the Indian Criminal Actions.

Sutherland’s certificate of incorporation allowed for it to provide indemnification of and advancement of expenses to directors through a variety of means, including through bylaw provisions and agreements. Sutherland’s bylaws, dated March 5, 2013, included a provision providing for the advancement of expenses incurred by officers and directors “in defending any proceeding in advance of its final disposition. . .”and also included a non-exclusivity provision providing that the indemnification and prepayment rights would “not be exclusive of any other rights which such person may have or hereafter acquire under any statute, provision of the Certificate of Incorporation, these Bylaws, agreement, vote of the stockholders or disinterested directors or otherwise.” The bylaws also obligated Sutherland to advance legal fees and expenses incurred to Plaintiff if he was serving at the request of Sutherland as a director, officer or employee or agent of another entity. Plaintiff and Sutherland also entered into an indemnification agreement, dated March 5, 2013, that provided customary indemnification rights to Plaintiff in connection with any claims brought against him in connection with his duties as a director or officer of Sutherland (a “Covered Event”). The indemnification agreement also included an obligation of Sutherland to advance expenses to Plaintiff in connection with any Covered Event, and similar to Sutherland’s bylaws, contained a non-exclusivity clause. The indemnification agreement, unlike the bylaws, also included a provision requiring Plaintiff to provide certain information and cooperation to Sutherland in connection with any claims (the “Cooperation Provision”).

Sutherland argued that Plaintiff was not entitled to advancement of legal fees and expenses under the bylaws because he had failed to comply with the Cooperation Provision in the indemnification agreement. Sutherland stated that because the bylaws and the indemnification agreement were entered into contemporaneously, they should be read conjunctively and the Court should enforce the Cooperation Provision as a condition precedent to Plaintiff’s right to the advancement of legal fees and expenses under either document. In contrast, Plaintiff argued that the bylaws and the indemnification agreement should be read separately and interpreted as providing separate sources of indemnification. Sutherland disputed whether Plaintiff served as a director of the entity owned by the controlling stockholder at Sutherland’s request or for Plaintiff’s own personal benefit.

In rendering his post-trial opinion, Vice Chancellor Montgomery-Reeves considered whether the bylaws and indemnification agreement should be read together or separately and whether Plaintiff had demonstrated that he had served as a director of another company at Sutherland’s request.

Vice Chancellor held that Section 145(f) of the Delaware General Corporation Law (“DGCL”) makes clear that the “indemnification and advancement rights under the DGCL are not exclusive of any additional indemnification and advancement rights a corporation chooses to provide through a separate instrument.” He further cited the recent case of Charney v. American Apparel, Inc., 2015 WL 5313769 (Del. Ch. Sept. 11, 2015), “for the proposition that the unavailability of advancement under one source of rights does not foreclose the possibility of advancement under another.”

Vice Chancellor also held that Delaware has long followed the “objective theory of contracts,” which requires a court to interpret contractual language to mean what a reasonable person in the position of the parties would have thought it meant, and where a contract is clear, to “interpret its terms according to their plain meaning.” He found that although the bylaws and the indemnification agreement were both effective as of March 5, 2013, the non-exclusivity provision in each made clear that the parties intended “for each instrument to provide rights and obligations independent of the other.” The Vice Chancellor further noted that if the parties intended the instruments to operate conjunctively, they could have easily included language to that effect in such instruments.

Vice Chancellor also rejected Sutherland’s argument that the Court should deny Plaintiff’s advancement for the India Criminal Actions because Plaintiff’s activities fell outside the scope of his Sutherland-related advancement rights. The Court held that the relevant inquiry was whether Plaintiff was serving as a director of another company at Sutherland’s request and found that he was. Therefore, the Court held that the bylaws entitled Plaintiff to recover from Sutherland the fees and expenses he incurred in responding to Sutherland’s setoff defense and counterclaim in the New York Action and in the India Criminal Action and Sutherland was obligated to advance Plaintiff’s legal fees and interest, totaling approximately 3 million Rupees for the Indian Criminal Actions and US$ 416,000 for the Delaware case and the underlying New York Action.

Narayanan v. Sutherland Global Holdings C.A. No. 11757-VCMR (Del. Ch. July 5, 2016)