United States: Officers and Directors of Companies Both Large and Small as Well as Non-Profit Groups Must Make Certain That They are Protected From Claims and Lawsuits

It is common knowledge to those who are familiar with current events that directors and officers of publicly held companies can be sued more easily based on recent legislation. However, officers and directors of private companies, even those with only a few shareholders, can also be easy targets for lawsuits from other shareholders or from other parties outside the company. One of the essential defense mechanisms that an officer or a director of any company, no matter how small, including officers and directors of non-profit groups, should insist on, is a written assurance in the corporate documents of the entity that if the officer or director needs to defend a claim or investigation, or is sued in his official capacity, that the company or non-profit group will promptly pay for any expenses or out-of-pocket costs incurred because of such claims, even if they do not rise to the level of a lawsuit.

It is especially important, in light of a recent Delaware Supreme Court case, that the company clarify and confirm that it will also reimburse the officer or director for any costs, including legal fees, that are incurred in seeking the indemnification or reimbursement from the company for the costs incurred due to claims, investigations or lawsuits against the officer or director for actions taken in his or her official capacity.

In what is known as "fees for fees," the Delaware Supreme Court recently clarified that an officer or a director can insist on being reimbursed for any legal fees incurred in connection with seeking reimbursement or indemnification from the company for costs incurred by the officer or director because of a defense to claims, investigations or suits against the officer or director. However, a company may limit this benefit allowed by statute. Although there is a Delaware statute that the court relied on, in the event that a company addresses the issue but does not clearly entitle the officer or director to "fees for fees," the ambiguity may prevent the entitlement that is otherwise due under the Delaware indemnification statute.

In sum, if you are the officer or director of any size company or non-profit group, you should insist that the corporate documents of the entity clearly entitle you to reimbursement, not only for any costs incurred as a result of claims made against you as an officer or a director, but it should also be made clear that you are entitled to any legal fees or other costs that are incurred in seeking reimbursement from the company in the event that the reimbursement or indemnification is not promptly provided by the company. Otherwise, it would be possible to spend as much in legal fees and other costs, as the original amount sought to be collected from the company.