Advancement rights: are you covered? Two recent Delaware decisions emphasize the need to review these rights and to monitor developments in this area.

• Author: Raymond, Doug
• Position: LEGAL BRIEF

SERVING AS A DIRECTOR of a company, particularly a public company, can be no picnic. Earnings disappointments, activist stockholders, government regulation, and difficult succession issues can keep directors awake at night. They should not also have to worry about having to defend their board actions with their own personal funds. Corporations should be able to assure their directors that litigation costs will be paid by the company, subject to well-known exceptions (such as where the director is found to have violated his or her fiduciary duties).

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Despite the importance of advancement and indemnification rights, Delaware law is far from certain as to the scope and limitations of these rights. Recent Delaware Chancery Court decisions, which come on the heels of Delaware corporation law amendments related to expense advancement, should trigger a careful re-examination of advancement and indemnification rights. In particular, boards and companies should know that:

* A company's bylaws may impose reasonable restrictions on expense advancements.

* The full scope of advancements and indemnification rights should, but does not necessarily have to, be contained in one document.

* Courts expect a director to be aware of the scope and restrictions of these protections as described in a company's charter and bylaws.

* A director may be entitled to these protections for defending against a company's counterclaim even if the original suit had been brought by the director against the company.

Advancement rights returned to the spotlight in 2008 with a controversial decision by the Delaware Chancery Court (Schoon v. Troy), which enforced a bylaw amendment that retroactively eliminated expense advancements to former directors. These directors, therefore, were on the hook for funding their own legal defenses. In the wake of Schoon, companies amended bylaws and entered into indemnification agreements with their directors to strengthen the advancement and indemnification rights and to prevent changes that would reduce these rights to the detriment of a former director. In response to Schoon, the Delaware legislature amended the corporation law to prohibit elimination of advancement rights after the occurrence of the action giving rise to the litigation, unless a specific provision explicitly authorized elimination. Following this amendment, many of the questions resulting from Schoon were resolved and the pressure to review these...