Most companies’ corporate bylaws or articles of incorporation contain indemnification and advancement provisions. While these provisions provide important protection for corporate executives if the individuals become the target of claims relating to their action undertaken in their corporate capacities, these provisions alone may not be provide sufficient protection. The provisions in the corporate documents may not address all of the issues that can arise and may not provide sufficient protection for the individuals when there are indemnification or advancement disputes and may not protect individuals from changes to corporate bylaws after the individuals have left the company. For these and many other reasons, well-advised corporate executives will want to have their rights memorialized in a separate, written indemnification and advancement agreement with the company, as discussed further below.
The most important reason for individuals to seek to put a written indemnification agreement in place is that written agreements typically provide more comprehensive protection than corporate bylaws or statutory provisions. Most bylaws, for example, provide for permissive indemnification, whereas most written agreements are written on a mandatory basis. Moreover, the rights enumerated in the agreement are enforceable obligations that cannot be amended or terminated without the individual executive’s agreement.
Another reason that directors and officers will seek to put contractual indemnification agreements in place is so that if the individuals are the target of claims after they have left the company, they can assert their rights of indemnification notwithstanding the arrival of new management. The contractual indemnification provides them an extra measure of protection and some level of assurance that their rights will be protected if claims arise after they have left the company.
A separate written indemnification provision can not only provide much greater procedural specificity but it can also provide certain protections against wrongful withholding of indemnification or advancement, by providing presumptions in favor of indemnification and providing for “fees on fees” (that is, fees incurred in order to enforce rights to advancement or indemnification).
There is a deeper reason why entering into a written agreement makes sense. That is that indemnification and advancement disputes are all too common, as I have noted on this blog (refer for example here). The disputes arise because the indemnification and advancement questions often arise in the midst of serious litigation, and frequently when the company is in the midst of a larger crisis. It is far better to try to sort as many of these issues as possible before the problems have arisen, when things are still calm. The use of a separate written agreement is one way to take steps while times are calm and relationships are cooperative to ensure that the individual directors’ and officers’ rights will be protected even when things are no longer calm and relationships have turned combative.
In addition, there are a number of important issues that a written indemnification agreement can address that the corporate bylaws typically do not address.
First, a written indemnification agreement can provide definitions of important terms. For example, the written agreement can provide an expansive definition of the types of “expenses” for which indemnification and advancement are available, and of the types of “proceedings” in connection with which the individual is entitled to advancement. By way of example, a written indemnification agreement might clarify that the individual is entitled to indemnification or advancement even if the individual is just a witness in a proceeding, and not only if the individual is a named party.
Second, the written agreement can memorialize the individual’s right to select their own counsel. This could be particularly critical if the issues arise after the individual has left the company and new management is in place. There may be a host of potential conflicts between the individual and the new management, which could militate in favor of the individual having his or her own counsel.
Third, the written agreement can specify the procedures to be followed if disputes arise with regard to indemnification or advancement. Among other things the written agreement can provide a presumption in favor of indemnification or advancement. The agreement will also provide a mechanism for resolving issues about disputed amounts or items. The agreement can also provide for an expedited dispute resolution procedure. Perhaps most importantly the agreement can provide for so-called “fees on fees” – that is, for reimbursement of expenses that an individual must incur to enforce indemnification or advancement rights.
Although individuals can try to protect themselves with a written indemnification agreement, the unfortunate fact is that when the time arises, the company may be financially unable to honor its indemnification or advancement commitments. For that reason, it is absolutely critical that the company maintain a robust and expansive D&O insurance program, so that if the company is financially unable to indemnify its directors and officers, the individuals can look to the insurance contract for protection. Even if the company is able to meet its indemnification obligations, the insurance can fund these obligations under its “reimbursement” coverage, on a “pay on behalf” basis, so that the company is not required to go out of pocket.
A well-designed D&O insurance program will include within its overall structure a layer of so-called Side A/DIC insurance. These kinds of policies have a number of important features that are available to protect individual directors and officers in certain kinds of catastrophic claims. This type of insurance not only provides excess insurance that protects only the individuals, but it also has a “drop down” feature under which the insurance can become first-dollar insurance providing protection under certain circumstances when the primary insurance is not available.
The provision of D&O insurance is another topic that the written indemnification agreement often will address. The agreement includes an undertaken by the company to continue to procure D&O insurance protection the individual as long as it is commercially available. The written indemnification agreement may also provide that the insurance will protect the individual to the same extent as the company’s then-current directors and officers.
Readers interested in learning more about written indemnification agreements dmay want to review the May 26, 2015 post on the Mintz Levin law firm’s Securities Matters blog (here), which details the importance for corporate officers of having a separate written indemnification agreement and discusses the key features that this type of agreement should include. An earlier memo from the Alston & Bird law firm discussing indemnification and advancement in general and the need for written indemnification agreements in particular can be found here.
The D&O Insurance Environment in Brazil: In several recent posts (here, for example), I have noted the significant increase in the number of D&O claims involving Brazilian companies. These claims have arisen from the ongoing Petrobras corruption scandal, as the investigation has spread to other companies, as well as the environmental disaster that followed the November 2015 collapse of the mining dam in the Mariana district in the state of Minas Gerais.
My blog post has focused on the claims that have been filed in the U.S., but as discussed in an August 5, 2015 Reuters article entitled “Brazilian Corruption Probe, Bankruptcies Spawn Insurance Boom” (here) the claims have emerged within Brazil itself as well. The article notes that the country’s deep economic recession has contributed to the claims activity.
As the article title suggests, the upsurge in claims activity has led to an increase in D&O insurance premiums. Among other things, the article suggests that aggregate D&O insurance premiums have more than doubled since 2011 (to $114 million), and individual companies have seen their premiums increase by 50 percent or more. Companies facing financial difficulties or that are involved in the corruption probe have found it difficult to obtain coverage, as many carriers decline to underwrite these risks. Companies with a heavy involvement in government contracts may also find the insurance difficult to obtain.
The article provides an interesting overview of the current D&O insurance situation in Brazil as well as the many contributing factors that are affecting the evolution of the D&O insurance marketplace in the country.
This Video Was Not Endorsed by the Author of The D&O Diary: Here at The D&O Diary, we are averse to product endorsements, so we are not quite sure what to say about the ubiquitous sparkling water that carries the same name as this blog’s author. We will say, without in any way meaning to suggest product endorsement, that we have found that the perfect summer evening beverage is a glass tumbler filled with ice and equal parts Vinho Verde from Portugal and sparkling LaCroix water.
All of that said, we definitely are not sure what to make of the following video, which was made by YouTube videographer Rakeem, and which is improbably devoted to the sparkling water. (Special thanks to Evan Shapiro of the Boundas Skarzynski firm for sending along a link to this article about the video.) Watch out for the eyebrows.