The Delaware Court of Chancery threw out all twelve claims a group of Jenzabar shareholders brought against the company’s founder, his former spouse, and the board. The shareholders complained about two things: that the company had paid the founder’s appeal bond and legal fees in an earlier case where he was found to have taken a corporate opportunity worth $81 million, and that a decade of generous stock and bonus awards had let the founder and his ex-wife grow their ownership from 18% to 91% while diluting everyone else. The court held that dilution claims like these belong to the company, not to individual shareholders, so they had to be brought as derivative claims on the company’s behalf.
The rest of the case failed on timing. The claims about the appeal bond and legal fees were filed too early, because the indemnification agreement required an independent lawyer to decide whether the founder was entitled to be reimbursed and that process was still underway. The compensation claims were filed too late, since the events happened between 2012 and 2015 and Delaware applies a three-year clock. The practical lesson for founders and counsel is that indemnification and advancement are different promises with different timing, and that if your equity grants ever draw scrutiny, the clock starts running when shareholders had enough information to ask questions.
