Hermelin v. K-V Pharmaceutical Co.
54 A.3d 1093, 2012 WL 395826, 2012 Del. Ch. LEXIS 23 (2012)
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Rule of Law:
Under Delaware General Corporation Law § 145(c), an officer or director is 'successful on the merits or otherwise' and entitled to mandatory indemnification only when they escape an adverse judgment or other detriment in the proceeding. A guilty plea, or a settlement where the officer accepts a significant personal penalty to benefit the corporation, does not constitute success.
Facts:
- In May 2008, K-V Pharmaceutical Company (KV) discovered it had manufactured and distributed oversized morphine sulfate tablets and other drugs.
- KV notified the Food and Drug Administration (FDA) about the morphine tablets but not the other oversized pills.
- Following an internal investigation by its Audit Committee into allegations of misconduct, KV terminated its CEO, Marc S. Hermelin, for cause in December 2008.
- As a result of a U.S. Attorney's Office investigation, Hermelin pled guilty to two federal strict liability misdemeanors, was ordered to pay $1.9 million in fines, and was sentenced to jail time.
- The FDA sought an injunction against KV and Hermelin, resulting in a consent decree that imposed no restrictions on Hermelin so long as he was no longer employed by KV.
- The Department of Health and Human Services (HHS) initiated proceedings to exclude Hermelin from all federal healthcare programs.
- To prevent KV's own mandatory exclusion from federal programs, Hermelin agreed to a 20-year exclusion for himself and divested his controlling stock interest in KV.
- While incarcerated, Hermelin's private conversations were recorded by the jail, and when a newspaper requested the recordings, Hermelin filed a lawsuit to enjoin their release.
Procedural Posture:
- Marc S. Hermelin, the plaintiff, sued K-V Pharmaceutical Company, the defendant, in the Delaware Court of Chancery seeking advancement of legal fees and indemnification for several legal proceedings.
- The parties filed cross-motions for partial summary judgment on whether Hermelin was entitled to mandatory indemnification for three specific matters and advancement for a fourth.
- The parties also briefed the court on the proper scope of discovery for the remaining claims for permissive indemnification.
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Issue:
Under Delaware law, does a former corporate officer achieve 'success on the merits or otherwise' for the purpose of mandatory indemnification when they: 1) plead guilty to all criminal charges brought against them; 2) accept a 20-year exclusion from their industry to prevent the corporation from being excluded; or 3) enter into a consent decree that ultimately imposes no personal restrictions or penalties?
Opinions:
Majority - Vice Chancellor Glasscock
No, as to the guilty plea and the industry exclusion; Yes, as to the consent decree. A corporate officer is only successful when they avoid an adverse result, and the court will not look behind the outcome to assess the reasons for it. For the criminal matter, Hermelin was not successful because he pled guilty to every charge against him, paid a substantial fine, and served jail time; avoiding potentially more serious, un-filed charges is irrelevant. For the HHS exclusion matter, Hermelin was not successful because he received a 20-year exclusion, which was the adverse outcome threatened; the fact that he accepted this penalty to save the company does not convert a personal loss into a personal success. However, for the FDA consent decree matter, Hermelin was successful because the FDA's complaint sought to impose restrictions on him, but the final decree imposed no new obligations or penalties, allowing him to escape an adverse judgment.
Analysis:
This opinion sharply clarifies the standard for mandatory indemnification under DGCL § 145(c) by establishing a strict, outcome-determinative test for 'success.' It holds that courts must look only at the final result of the charges or claims actually brought against the indemnitee, not the strategic reasons for a plea or settlement, nor hypothetical worse outcomes that were avoided. This creates a bright-line distinction between the simple, objective inquiry for mandatory indemnification and the complex, fact-intensive 'good faith' inquiry required for permissive indemnification. The ruling underscores that an individual's sacrifice for the corporation's benefit does not constitute personal 'success' for indemnification purposes.
