When Are Corporate Indemnification Claims Ripe (for Delaware Corporations)?

Overripe Bananas

In a decision that is likely to unpleasantly surprise many directors and officers of Delaware companies, the Delaware Court of Chancery recently found that corporate indemnification is typically not timely (not “a ripe claim”) until the underlying litigation on which it is based is final and all appeals completed.

There were some unusual facts but, sadly, the rarity of the circumstances would not appear to have dictated the outcome. In the case in point:

  • A Texas court entered a judgment against two board members
  • This resulted from a finding of breach of fiduciary duty by the two in connection with an alleged theft (or usurpation) of a corporate opportunity
  • The remedy included a damage award of $95 million against the two directors
  • While appealing the Texas decision, the directors sought indemnification of their expenses from the Delaware corporation.

Chapter 8 Delaware Code § 145

(c) To the extent that a present or former director or officer of a corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in subsections (a) and (b) of this section, or in defense of any claim, issue or matter therein, such person shall be indemnified against expenses (including attorneys’ fees) actually and reasonably incurred by such person in connection therewith.

The pair sought indemnification on the ground that they were “successful” within the meaning of 8 Del. C. § 145(c) because, based on the argument that, while there were originally eight counts asserted against them, ultimately at trial only a single breach of fiduciary claim was presented to the jury.

The Delaware court was asked to consider the Delaware corporation’s motion to dismiss or stay the indemnification action. It granted the motion to dismiss the directors’ claim for indemnification, without prejudice, “on the ground that is most sensitive to the important interests at stake.”

According to the court, under of Delaware law, “indemnification claims do not typically ripen until after the merits of an action have been decided, and all appeals have been resolved.”

Smackdown

Claims for indemnification, the court explained, require a careful analysis of the record in the underlying action and a careful consideration of exactly how partial the defendants’ success was — something which cannot be properly done until the underlying action is finally completed.  Doing so in advance of a final determination of the underlying action would risk the potential need to reopen and revise the holding in the indemnification action if there was a change in appeal of the underlying action.

“Corporate fiduciaries [or directors] who, unless they overturn a jury verdict, owe the corporation nearly $100 million and must yield to the company’s substantial property rights, because they have been adjudicated to have breached their fiduciary duties, are not in an equitable position to ask this court to allow them to prematurely seek a money damages claim from the corporation to which they owed a duty of loyalty.”

What Does This Mean from the Perspective of D&O Insurance?

Firstly, in most instances, after deliberation, companies advance defense costs. But—and this can be a big “but” – where the company itself is suing its directors, as in this case, no one should expect the firm to advance defense costs to the director defendants.

Most Directors and Officers Liability (D&O) insurance have removed the provision requiring companies to first indemnify their directors and officers to the fullest extent allowable by law. Instead, most policies cover where the company has not indemnified its directors and officers.

In the U.S., there is typically either an “entity versus insured” or an “insured versus insured” exclusion that would likely preclude coverage for situations where the firm sues its own directors.

About Ann Longmore

Ann is Executive Vice President of Willis' Executive Risks practice. Based in New York, she has been with the compa…
Categories: Directors & Officers, Executive Risk | Tags: ,

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