CA1: Duress and indemnification of directors in SEC enforcement proceedings

SEC v. Happ, No. 06-1324 *10/20/06. Due to technical difficulties, there was some delay. While this case involves an interesting tale of securities law, it really comes down to a question of “what is duress.” Duress, as we might guess is something usually suffered by poor people. Mr. Happ was the former director of a subsidiary of Corning, and sought indemnification that he was contractually entitled to as a director. However, when Happ was allegedly informed that the company was having some problems, he allegedly sold all his stock. The SEC civilly went after Happ for insider trading, and Corning reluctantly agreed to fund his defense provided unless it was “’finally determined" that he ‘wrongfully used material non-public information.’” Happ claims that Corning not only breached the indemnification provisions, but refused to cooperate with him in providing him the needed documents to mount his defense. A jury decided against Happ. Happ sued Corning , arguing that the agreement was secured by duress. Corning counterclaimed. On summary judgment, corning won!

Applying Massachusetts contract law (or rather, Corbin on Contracts), the court defines “duress” like this:

(1) he has been the victim of some unlawful or wrongful act or threat;
(2) the act or threat deprived him of his free or unfettered will; and
(3) due to the first two factors, he was compelled to make a disproportionate exchange of values.

But the court finds that even though there are differences of opinion regarding whether such an agreement is proper under Del. Code Ann. tit. 8, § 145(a) (2006)  (Delaware is where the companies are incorporated), as  Corning argues that it could not agree to an unconditional indemnification, Corning was not doing anything wrong because Delaware law on the issue is ambiguous.  Moreover, the First points out that Happ could have just sued   Corning earlier for a declaratory judgment on the issue.

And, in the alternative, Happ’s claim would have failed solely in terms of Delware law, because it is hard to argue that he was acting in good faith, when a jury determined that he had violated a federal regulation, anyway.