A recent Delaware Business Court Insider story, “Genelux Founder Allowed to Seek Fee Award,” reports that the Delaware Supreme Court has partly vacated a Delaware Chancery Court decision and allowed the founder of a biopharmaceutical company to pursue fees and expenses in a related bad-faith fiduciary duties suit against corporate directors.
An October ruling by former Vice Chancellor Donald F. Parsons Jr. had initially blocked fee-shifting in the case under the bad-faith exception to the American Rule, in a case where the biopharmaceutical company, Genelux Corp., had tried to invalidate a stock issue that ousted company co-founder Aladar Szalay from the board but also allowed him to install two directors aligned with his interests.
Parsons did however levy $10,000 in sanctions against Genelux on allegations that the company destroyed evidence and falsely verified documents. Still, Szalay was not entitled to fees and expenses because he had prevailed on the merits, and he had already won advancement in another proceeding, Parsons ruled.
The parties cross-appealed, but Genelux dropped its appeal and satisfied the advancement order just nine days before both sides were set to make oral arguments in June. The Supreme Court, in a June 9 order, dismissed Szalay's cross appeal as moot, finding that "no financial consequences remained in controversy."
But Szalay moved to have the operative part of Parsons' ruling vacated, arguing it would have a preclusive effect on pending derivative action challenging the conduct of the board in litigating the suit.
"In the interests of justice, this court should vacate that portion of the judgment denying defendants attorneys fees under the bad faith exception to the American Rule, to prevent the unappealable judgment from obtaining precedential or preclusive res judicata effect," Szalay's lawyers argued in a filing.
Chief Justice Leo E. Strine Jr., in a three-page order dated July 6, said the case fit a "limited set of circumstances" that warranted granted vacatur.
"Because the plaintiff's decision to advance the funds when they did was beyond the defendants' control, it would be contrary to the interests of justice to allow the Court of Chancery's prior denial of the defendants' request for additional sanctions, and attorneys fees and expenses, to have precedential or preclusive effect," Strine said.