A former director of a Delaware corporation sued for advancement in connection with defending threatened and pending fiduciary duty based claims filed by the corporation. At issue were the corporation’s by-laws and subsequent amendments regarding the corporation’s advancement and indemnification obligations to its former directors. Specifically, the pre-amendment by-laws provided that “the Corporation shall pay the expenses incurred by any present or former director . . . . ” Following the amendment, the provision read “[l]osses reasonably incurred by a director or officer in defending any threatened or pending Proceeding . . . shall be paid by the Corporation in advance of the final disposition . . . .” The corporation cited this amendment as precluding the former officer from receiving any advancement of defense costs. In its briefing, the corporation stated that the purpose of this amendment was to “delete former directors from entitlement to advancement.”
The former director argued that his rights to advancement vested when he took office and the corporation could not terminate the right without his consent. The court disagreed and held that a director’s right to advancement does not vest until the director is named as a defendant in a proceeding for which advancement and indemnification are available. Because the threatened and pending fiduciary duty based claims were not initiated against the former director until after the amendment of the corporation’s by-laws, the court found that the former director’s advancement and indemnification rights were controlled by the amended by-laws, which did not require advancement for former directors.
As a result of this decision, under Delaware law, a director’s or officer’s indemnification and advancement rights under a company’s by-laws may or may not be guaranteed, depending on the wording, and could be subject to modification without consent of the director or officer.
For a full copy of the opinion, please click here.