As we noted last week, the vestiges of the 2008-2009 economic meltdown include various ongoing litigation and regulatory enforcement actions against corporate officers and directors. With this risk fresh in our minds, an important exercise that officers and board members (with the assistance of corporate or outside counsel) should consider this year in a "What if?" scenario process that carefully reviews existing company D&O coverage and indemnification provisions to determine, among other things, whether the company will advance attorney's fees in various litigation and regulatory enforcement situations. This process is particularly important when you add to the scenario the possibility that the executive or director may become adverse in the middle of the process.
This Blog has spilled a lot of ink on the new types of litigation being brought against corporate officers and directors over executive compensation issues. In fact, all forms of litigation against officers and directors are on the rise. This is a topic too big for one Blog post, but I will try to make some quick points and follow up next week.
Companies typically employ three complementary forms of liability protection for their officers and directors.
- Indemnification Provisions in the Charter or By-Laws,
- Individual Indemnification Agreements, and
- D&O Insurance.
Regarding the desirability of individual indemnification agreements, it has been five years since I first blogged on Schoon v. Troy Corp., so maybe a quick refresher is in order. In Schoon, the Delaware Chancery Court upheld the right of a corporation to amend its by-laws after the departure of a director to eliminate the key protections of fee advancement and indemnification rights for any claims related to his service on the board, which were brought after his departure from the board. Yikes!
Therefore, a separate indemnification agreement for each officer and director, in addition to the Company's by-laws, usually provide better protection. The Company can amend its by-laws without consulting the officers and directors, who may have fallen out of favor with the company and/or the board. Individual agreements also can provide more specific, detailed protection and comprehensive protection indemnification than would be common in by-laws.
Now might be a good time to review (and, if necessary, update) the protection the company provides to its officers and directors through indemnification and D&O insurance.
This entry has been created for information and planning purposes. It is not intended to be, nor should it be substituted for, legal advice, which turns on specific facts.