How Director and Officer Indemnification Agreements Can Help Attract Top Talent

A substantial uptick in securities litigation and an increased regulatory enforcement focus have put directors and officers squarely in the cross-hairs for exposure from lawsuits and investigations.  To attract and retain high-quality directors and officers, companies should review and, if necessary, strengthen the protections provided to their directors and officers.  Insurance, statutory indemnification requirements, and protections set forth in the corporation’s charter documents (the certificate of incorporation and bylaws) can all provide protection against personal exposure – but can leave ambiguities or gaps in coverage potentially exposing directors and officers to significant personal out-of-pocket costs in connection with a dispute or an investigation.  The following are a few ways indemnification agreements can provide additional protection for directors and key officers.

Require Consent for Future Amendments. Relying on a corporation’s governing documents for protection means that changes can be made to the scope of protection without the express written consent of the covered director or officer.  Likewise, the corporation can alter or amend director and officer insurance coverage without the consent of the covered individual.  An indemnification agreement, by contrast, can provide that the corporation will not unilaterally amend or rescind advancement or indemnification rights by providing that the agreement may not be amended without the express written consent of the covered director or officer.

Provide Clarity for the Meaning of Key Terms.  An indemnification agreement permits the corporation and the covered individual to address specific rights in more detail by defining key terms.  By providing detailed definitions for such terms as “expenses,” “proceeding” and “officer,” costly and time-consuming conflicts over the scope of indemnification obligations can be minimized or avoided.  For example, the definition of “proceeding” can be defined to include threatened claims and internal investigations and thus provide for the advancement of expenses for legal representation during crucial pre-litigation proceedings.

Time Frames for Payment and Expedited Resolution of Indemnification Rights.  If the targeted director or officer has a dispute with the corporation as to whether they are entitled to   advancement of attorneys’ fees in a particular circumstance – time is of the essence for the affected individual.  Determining whether and to what extent they can afford to hire separate counsel to represent them and their interests is of crucial importance as the proceeding or investigation will move forward regardless of whether the corporation has agreed to foot the bill for their representation.  Similarly, if a corporation drags its feet on making good on required advancements, the director or officer may have to personally cover the expense in order to ensure continuity of representation.  Accordingly, an indemnification agreement can require that advances or indemnification payments be made within a specific time frame.  Likewise, if there is a dispute as to whether the individual is entitled to advancement or indemnification, an indemnification agreement can provide clarity as to who at the corporation makes the initial determination and within what time frame.  If that initial determination is adverse to the indemnitee, the indemnification agreement can provide a procedure for appealing the determination and require that it be completed in an expedited time frame – with the indemnitee to be indemnified for expenses associated with this appeal.

Certainty as to the Level and Scope of Insurance Coverage.  An indemnification agreement can also provide that the corporation will provide D&O insurance that protects the indemnitee to the same extent and on the same terms as the most favorably insured of the corporation’s current directors and officers.  The indemnification agreement can also provide that the indemnitee is required to receive written notice from the corporation of any changes to the nature and scope of D&O insurance.

Certainty as to Covered Conduct.  An indemnification agreement can make clear that the director or officer is indemnified for not only service to the corporation itself, but also in situations where the director or officer is serving in another capacity at a different entity for the benefit of or at the request of the corporation.

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