McBride Law Blog

Delaware Law Update: Director Indemnification and Advancement of Legal Expenses (Part I)

McBride Law Blog

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Companies get sued all the time.  Directors and officers often get named in lawsuits as those responsible for important corporate actions and are particularly vulnerable in that regard.  For this reason, many companies offer their directors and officers liability insurance and certain contractual provisions to protect them against the burden of having to defend a lawsuit with their own money.  Indemnification is a contractual obligation by one party to pay or compensate for all losses (including the legal costs) incurred by another.  A typical indemnification clause for a director or officer would say that the company shall fully indemnify the director or officer against all claims, demands, actions, suits, damages, etc. related to any actions taken in their capacity as director or officer.  Advancement of legal fees and expenses is another layer of protection afforded to directors and officers, providing immediate relief from out-of-pocket financial burden without having to wait until the end of the legal proceeding, which, depending on the situation, can take years.

Most state statutes set forth corporations’ indemnification and advancement obligations, with varying degrees.  Many of these obligations, however, are only binding on a corporation when they are set forth in the corporation’s organizational documents (i.e., certificate of incorporation and/or bylaws) or other contracts (e.g., employment agreement).[1]  But what if those various documents contain potentially conflicting indemnification and advancement provisions?  In Narayanan v. Sutherland Global Holdings, Inc.,[2] a recent Delaware case, the court had to decide whether and to what extent a director was entitled to advancement of legal fees and expenses under multiple legal instruments.

This post was part of a multi-part series on indemnification and advancement of legal expenses for officers and directors under Delaware law.  You can find the other post by searching our blogs at www.mcbrideattorneys.com.   In our next post, we will discuss the details of Narayanan v. Sutherland Global Holdings, Inc.

This posting is intended to be a planning tool to familiarize readers with some of the high-level issues discussed herein.  This is not meant to be a comprehensive discussion and additional details should be discussed with your transaction planners including attorneys, accountants, consultants, bankers and other business planners who can provide advice for your circumstances.  This article should not be treated as legal advice to any person or entity.

Steps have been taken to verify the contents of this article prior to publication.  However, readers should not, and may not, rely on this article.  Please consult with counsel to verify all contents and do not rely solely on this article in planning your legal transactions.

About the Author

So-Eun Lee – So-Eun Lee is an associate attorney in the New York office of The R. Shawn McBride Law Firm, PLLC.  She concentrates her practice on business law.  So-Eun can be contacted at soeun.lee@mcbrideattorneys.com.  Her profile is available on www.mcbrideattorneys.com.

[1] Kathy Lochman and Matthew J. Lund, A Primer on Advancement of Defense Costs: The Rights and Duties of Officers and Corporations (Oct. 1, 2007), http://www.pepperlaw.com/publications/a-primer-on-advancement-of-defense-costs-the-rights-and-duties-of-officers-and-corporations-2007-10-01/.

[2] Narayanan v. Sutherland Global Holdings, Inc., C.A. No. 11757-VCMR (Del. Ct. Chan. July 5, 2016).  Unless otherwise stated, all references to the case are to this citation.

Posted In: Business Management, Delaware Law Update, Uncategorized

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