The Delaware Chancery Court was recently asked to rule on an issue of first impression: whether a corporation’s duty to advance its executives’ legal bills includes expenses incurred in appealing criminal convictions.  Sun-Times Media Group, Inc. v. Black et al., No. 3518-VCP.

The case arises out of the mail fraud convictions of Conrad Black and several other former officers of Sun-Times Media Group. To date, Sun-Times has reportedly advanced approximately $70 million for the criminal defense of these executives, and expects to incur millions more in the appeal of these convictions.  Sun-Times’ complaint seeks a declaration that it has no duty to advance any further amounts and seeks the return of advancements previously made.

Sun-Times bases its argument on Delaware indemnification law and Delaware public policy.  Specifically, Delaware’s indemnification law is intended to provide a measure of security to corporate directors and officers from personal liability for civil and criminal actions arising out of acts in a corporate capacity.  However, Sun-Times argues that after an executive has been convicted and sentenced, he or she is not entitled to a presumption of innocence for indemnification, because it has been established that the individual was dishonest or disloyal.

Therefore, at that point, the public policy of protecting corporate executives no longer justifies imposing the legal expenses of convicted executives on shareholders.  Black and his former colleagues’ opposition papers have focused on Sun-Times’ by-laws and indemnification agreements, which require advancement of legal expenses through “final disposition” of the criminal proceedings (which arguably include the costs of appeal).

We will be following the development of this litigation because of the potential implications it could have as to D&O insurance, and will provide updates on InsureReinsure.com.