Corporate bylaws often extend certain protections to former
directors, including (for example) the advancement of
litigation-related expenses to a director who is sued in
connection with his or her corporate duties (a sort of
"indemnity-in-advance"). However, the recent decision
of the Delaware Chancery Court in Schoon v.
Troy1 suggests that such bylaws may not be
sufficient to protect a former director.
In Schoon v. Troy, a former director of Troy
Corporation (the "Company") was sued in 2006 by the
Company for breach of his fiduciary duty for actions taken
while serving as a director from 1998 to 2005. During his
tenure, the Company's bylaws provided for the
advancement of litigation-related expenses to present and
former directors. However, subsequent to his resignation, the
bylaws were amended to remove former directors' right
to advancement. The former director filed a separate action
against the Company, seeking recognition of his right to
advancement based on the bylaws which where in effect during
his tenure as director.
The Court rejected the former director's claim for
advancement. The Court held that the former director's
rights were not defined by outdated bylaws, regardless of
whether such bylaws were in place during his tenure on the
Company's Board. The former director's right to
advancement did not vest until he was named as a defendant in
the action. As such action was commenced after the
amendments to the Company's bylaws, the former director
was not entitled to advancement. The corporate bylaws governing
a former director's right to advancement are those in
effect at the time the related litigation arises. The effect of
this decision is that, generally, subsequent amendments to
corporate bylaws can alter or eliminate any protections
previously extended to former directors.
This decision seems highly logical. Corporate bylaws are,
after all, constating documents intended to govern the affairs
of a particular corporation rather than contractual agreements
between a corporation and a particular director. It follows
that corporate bylaws may be amended as a sitting Board of
Directors deems fit. Accordingly, outgoing directors should be
wary of relying on corporate bylaws that provide for
advancement (or, for that matter, indemnity above and beyond
that provided for in the OBCA, CBCA or other
corporations legislation) as such bylaws are forever subject to
From a director's standpoint, it is preferable to
address advancement, indemnification and any other protections
by way of a separate contract prior to accepting a position on
1. Schoon v. Troy Corporation, C.A. 2362-VCL
(Del. Ch., March 28, 2008).
Under the Income Tax Act, the Employment Insurance Act, and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions or GST.
Under the Income Tax Act, the Employment Insurance Act, the Canada Pension Plan Act and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions.
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