Paul Lockwood
Arthur Bookout

Among the most crucial issues in the world of directors and officers liability are the related questions of indemnification and advancement. Since so many companies are incorporated in Delaware, the laws of indemnification and advancement in Delaware are particularly important with respect to scope of protection available for directors and officers. In the following guest post, Paul Lockwood and Art Bookout of the Skadden, Arps, Slate, Meagher & Flom law firm take a look at these issues, with a particular focus on limitations under Delaware law on indemnification and advancement rights. A version of this paper previously was published as an AIG White Paper. I would like to thank the authors and AIG for allowing me to publish this article as a guest post. I welcome guest post submissions from responsible authors on topics of interest to this blog’s readers. Please contact me directly if you would like to submit a guest post. Here is Paul and Art’s article.
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An issue that frequently comes up when companies are in bankruptcy or in other forms of receivership is whether the companies’ D&O insurer can advance payment of individuals’ defense costs over the receiver’s objections. In a recent case, a Northern District of Texas judge has ruled that the individual defendants in an SEC enforcement action are entitled to have their defense expenses advanced notwithstanding the asset stay in the proceeding and despite the receiver’s objections. However the policy’s limits of liability are all but exhausted, which raises its own set of issues, as discussed below. Northern District of Texas Judge Sydney Fitzwater’s June 6, 2018 opinion in the case can be found here.
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Rachel W. Northup
Steven M. Haas

Directors and Officers liability insurance policies of course protect corporate directors and officers. Similarly, advancement and indemnification typically are available to corporate directors and officers. But who is an “officer”? As I have discussed in prior posts on this site (more recently here), this is an important question that can have significant implications. In the following guest post, Rachel W. Northup and Steven M. Haas of the Hunton & Williams law firm take a look at this important question and the significant issues it can involve. I would like to thank Rachel and Steven for their willingness to allow me to publish their article as a guest post on this site. I welcome guest post submissions from responsible authors on topics of interest to this site’s readers. Please contact me directly if you would like to publish a guest post. Here is Rachel and Steven’s guest post.
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job-titleIndividuals 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.
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handshake1Most 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.
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dojAlthough it is not something that is often considered, D&O insurance is in many ways a financial tool allowing companies to manage their indemnification obligations to their directors and officers. The D&O policy’s reimbursement coverage recompenses the company when it honors its indemnification obligations to its corporate officials, and the policy’s individual coverage (usual referred to as Side A coverage) protects the individuals when the company is unable to honor its indemnification obligations, whether due to insolvency or legal prohibition.

D&O insurance is of course a critical part of corporate risk management, but the fact is that indemnification is an even more basic and comprehensive source of protection for corporate executives. Even for companies that purchase and maintain significant levels of D&O insurance, corporate indemnification provides important protection for company officials. D&O insurance is subject to limits of liability, whereas indemnification is theoretically unlimited (although, of course, practically limited by the indemnifying company’s financial resources). Indemnification is often very broad, often extending “to the maximum extent permitted by law,” whereas D&O insurance polices contain numerous exclusions and conditions. In addition, D&O insurance must be renewed each year, with possible changes in terms and conditions. Indemnification rights are much less likely to be changed, particularly, as noted below, for corporate officials who negotiate their own indemnification contracts.

Indemnification, then, is a very important consideration for all corporate directors and officers. While this has long been true, indemnification arguably has taken on an increased importance in light of the recent action by the U.S. Department of Justice. As I discussed in a post at the time (here), in September the U.S. Department of Justice released a directive —  referred to as “the Yates Memo” –restating and reinforcing the agency’s commitment to targeting corporate executives in cases of corporate wrongdoing. The cornerstone of the agency’s new policies is the specification that in order for a company to qualify for any cooperation credit in connection with a DoJ investigation, the company must provide the agency with all relevant facts about the individuals involved in the misconduct.
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masseyMost senior corporate executive have a general understanding of the importance to them of their corporate indemnification rights. As discussed here, a related but sometimes even more important corporate benefit is the right to advancement – that is, the right to have their defense fees paid on a contemporaneous basis while legal proceedings against

gsMany companies provide advancement, indemnification and insurance benefits and protection for their officers and directors. However, it is not always clear who is an “officer” for purposes of claiming the benefits and protection. The long-running and high-profile saga of Sergey Aleynikov, the former Goldman Sachs computer programmer and company Vice President accused of stealing proprietary