INDEMNITY AGREEMENTS – CORPORATE BY-LAWS AND THE YATES MEMO

Last September Deputy Attorney General Sally Yates authored a six point Memorandum that identified how the Department of Justice would more effectively go after individuals responsible for corporate wrongdoing. The theory behind the new found emphasis on going after individuals being that corporations only act through individuals. Please click here for a detailed entry I wrote last year on this blog about the Yates Memo.

From an officer or director’s point of view in light of the Yates Memo, they need to take a critical review of the indemnity provisions that are currently in place. By this I mean, what is their employer’s obligations to them if the officers, directors or even high level employees are accused of corporate wrongdoing by either an outside entity like the Justice Department, a disgruntled shareholder in the form of a derivative lawsuit, or perhaps even an internal company investigation? Hiring an independent lawyer to protect your interest in any of these situations is expensive so it is better if the company will pay your legal expenses and even better if your company will advance your legal expenses. Click here for a blog entry I wrote two months ago that explains why it is important to have your own lawyer represent you during these investigations.

To determine what your company will or will not indemnify requires a review of the company’s by-laws. Additional places indemnity provisions can be found are in an employment agreement and not surprisingly, an indemnity agreement. The best protection for an officer or director is actually to have a separate indemnity agreement. Too often I see my clients come to me with their problems but say, “I am not worried, I have indemnification. Look at the by-laws I brought.” Don’t get me wrong, this is a good start, but that is all it is. Do the by-laws require indemnification or is it permissive and require a vote of the board of directors? Even if it is required, are legal fees advanced or only paid after you are found not to have violated your fiduciary duties? Even if the by-laws state it is required and legal fees are to be advanced, what is the process for advancing legal fees? Will the company and its insurance carrier be able to hide behind a convoluted process to delay payments? Does the employer have the ability to restrict your choice of counsel? As you can see there are a myriad of issues even when it seems clear. Even if you have D&O Insurance, keep in mind that the carrier’s policy has exclusions. For example, a typical D&O policy will not cover attorneys’ fee in an internal corporate investigation. Also, D&O policies change year to year as companies are always shopping for better prices so what coverage you have in year one may not be what you have in year two and beyond. However, a well drafted indemnity agreement will require the company to cover all expenses, including legal, incurred in connection with your position as an officer or director of the company to the fullest extent permitted by law and will not change in scope from year to year. These are big differences.

The takeaway – As an employee or an employer review your by-laws, employment agreements and D&O policies and indemnity agreements if you have them. Perhaps it is time to change your by-laws to make what once was permissive indemnification to mandatory? Alternatively, perhaps you only want to offer mandatory indemnification to certain individuals so indemnification agreements are the better approach? If you are an employee, you may want to negotiate for additional protections when the opportunity arises. Whatever course of action you decide, please feel free to call Doug Leavitt, one of the attorneys with Danziger Shapiro & Leavitt, P.C. to discuss this and other governance issue affecting you or your company.

This entry is presented for informational purposes only and is not intended to constitute legal advice.

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