Individuals serving as corporate officers take on significant potential liability exposures in the course of their performance of their duties. As a result, most companies indemnify their officers for liabilities incurred while acting as corporate officers. A recurring issue is the question of who is entitled to indemnification. In particular, a particular issue that courts have grappled with recently is the question of whether an individual with the title of “Vice President” is entitled to indemnification.
In two recent decisions involving efforts by persons with the Vice President title to obtain advancement of their defense costs under corporate indemnification provisions, the Delaware Court of Chancery held that, though the Vice President title sounds like a corporate officer position, the individuals involved were not entitled to indemnification or advancement. These rulings underscore the problems that can arise in determining whether or not individuals are entitled to the benefit of corporate indemnification. They also present a number of important lessons on indemnification in general, as well as with respect to D&O insurance.
The first of the two recent cases, Pulier v. Computer Sciences Corp., arose after Computer Sciences Corp. (CSC) acquired Service Mesh. After the acquisition, Eric Pulier, Service Mesh’s former CEO, continued to run the former Service Mesh business as a division of CSC, with the title of “Vice President and General Manager” of CSC. CSC later sued Pulier alleging that he had inflated Service Mesh’s revenues. Pulier sought to have his fees advanced under CSC’s indemnification provisions. In a May 12, 2016 oral ruling (transcript here, hat tip to Francis Pillegi of the Delaware Corporate and Commercial Litigation blog), Chancellor Andre Bouchard held that while Pulier was entitled to advancement of his fees with respect to his pre-transaction conduct as Service Mesh’s CEO, he was not entitled to advancement of his fees incurred in defending allegations relating to his post-transaction conduct.
Pulier had argued that his title as a Vice President of CSC made him an officer of the company, as a result of which he was entitled to advancement of his costs of defending allegations relating to his post-transaction conduct. Chancellor Bouchard rejected this argument, holding that under the laws of Nevada (the state in which CSC is incorporated) an employee becomes an officer of a company only according to the provisions of the company’s bylaws. CSC’s bylaws provided that officers must be elected by the board and CSC’s board of directors had not elected Pulier as an officer, as a result of which Pulier was not entitled to advancement.
The second of the two recent decisions is the latest step in the long-running efforts of former Goldman Sachs employee Sergei Aleynikov to obtain advancement of the expenses he incurred in defending against criminal charges that he had stolen computer code from Goldman. As I discussed in a prior post (here), in September 2014, the Third Circuit reversed a lower court ruling that Aleynikov was entitled to advancement; the Third Circuit held that Goldman’s bylaws were ambiguous, and therefore vacated the lower court’s entry of summary judgment in Aleynikov’s favor. Following the Third Circuit’s ruling, Aleynikov filed an action in Delaware Chancery Court seeking a determination of his indemnification rights under Delaware law. In a July 13, 2016 order (here), Vice Chancellor Travis Laster held, in light of the Third Circuit’s ruling and in reliance of the doctrine of issue preclusion, that Goldman’s bylaws do not require the company to advance Aleynikov’s fees. An August 5, 2016 memo from the Duane Morris law firm (here) analyzes Vice Chancellor Laster’s opinion in the case.
Because of the reliance on issue preclusion principles, the ruling does not otherwise represent a detailed analysis of Aleynikov’s advancement rights. However, as Francis Pileggi pointed out in a July 31, 2016 post about the ruling, the Chancery Court ruling in the Aleynikov case and the court’s earlier ruling in the Pulier case both represent instances where the Chancery Court has reached “the uncommon result of denying advancement.”
Indeed, the Delaware courts typically are at great pains to emphasize that Delaware has a strong public policy in favor of advancement, yet in these two cases, it was held that the individuals involved were not entitled to advancement. To be sure, in the Pulier case, the Chancery Court’s decision was dependent on its interpretation of Nevada law, and in the Aleynikov case, the Chancery Court’s ruling was dictated by the Third Circuit’s prior determinations (of New Jersey law). Both rulings were very much fact- and context-specific. But the fact is that in each of the two cases, the individuals were unable to obtain advancement.
The common thread between the two cases is that in each case the individual involved held the title of Vice President. Although the VP designation has the ring of an officer title, it may not always mean what it seems to suggest (particularly, it appears, when it comes to indemnification questions). Indeed, when the Aleynikov case was in the Third Circuit, Goldman Sachs had tried to argue, among other things, that there has been “title inflation” in the financial services industry and that the title “vice president” is not particularly meaningful.
The basic question that these cases present is one that can and often does arise all too often when lower level personnel are seeking indemnification or advancement. By-law provisions frequently are unclear or ambiguous and the question often has not been considered until the moment that the issue arises.
As discussed in a July 29, 2016 memo from the Sherman & Sterling law firm about these two recent Chancery Court decisions (here), companies may want to consider consulting with their outside counsel and having their bylaws examined in order to ensure that the bylaw provisions relating to advancement and indemnification accurately and clearly identify the categories of persons entitled to advancement and indemnification.
The Pulier case may have an added lesson for individuals who served in officer roles in an acquired company and who continue to work for the acquiring company after the transaction. Pulier himself served in an indemnified role at his former company, but not, it turned out, in the acquiring company. As Francis Pileggi notes in his blog post about the ruling, officers and directors who remain in the services of the acquiring company may want to be aware of this issue and to seek clarification of their status in the new company, particularly on the issue of indemnification and advancement.
There are other considerations that those drafting bylaw indemnification and advancement provisions may want to take into account. First, though Delaware has a strong public policy in favor of advancement, Delaware law may not control (if, for example, the company is not a Delaware corporation). Those drafting bylaw provisions may want to incorporate into the bylaws a provision affirmatively specifying that there will be a presumption in favor of advancement and providing a mechanism for interim payments if there is a dispute over the entitlement to advancement.
In addition, when companies (like for example, Goldman Sachs, or even CSC) that have complex corporate structures, it may be appropriate for separate operating units to have separate indemnification provisions. This type of arrangement could help to avoid questions involving personnel working within corporate operating divisions.
Individuals concerned about the indemnification and advancement rights may want to seek to obtain a written indemnification and advancement agreement. To be sure, these kinds of written agreements typically involve only the most senior corporate executives; lower level personnel like the ones involved in these two cases are unlikely to have the opportunity to negotiate these kinds of agreements. Nevertheless, for those individuals who can obtain these kinds of agreements, the written document can offer substantial advantages (as discussed here).
These questions about the meaning and effect of job titles are not limited just to questions of indemnification and advancement. These issues could also arise in the context of D&O insurance as well. Under the typical public company D&O insurance policy, all employees are insured persons but only for Securities Claims. For D&O claims other than Securities Claims, the term “Insured Persons” in a public company D&O insurance policy typically is limited to “duly elected or appointed officers and directors.” (In private company D&O policies, by contrast, employees are Insured Persons for all types of claims.) The problem of whether or not a person with the title of Vice President comes within this definition is the same as for purposes of determining indemnification or advancement rights. The question may well arise whether or not the Vice President in question was duly elected or appointed. One way some companies try to address this question is request that the policy be specially endorsed to specify that persons holding specific titles or offices are insured persons within the meaning of the policy.
One final note. For those of us who have always been trouble by the use of the word “vice” in the title Vice President, Keith Bishop of the Allen Matkins law firm has an interesting postscript in a post on the California Corporate & Securities Law blog about the etymology of the word “vice.” The Latin derivation of the word is more complex than I ever considered.