Client Alert

A recent Delaware Court of Chancery decision may have a significant impact in the area of director indemnification. In Schoon v. Troy Corp.,¹ the Court upheld a bylaw amendment eliminating the right to indemnification advancement for former directors,² even though the director seeking advancement had served on the board during a period when the bylaws required advancement of expenses.

The case involved William Bohnen, a director who served on the Board of Troy Corporation from 1998 until February 2005. During Bohnen’s tenure on the Board, the company’s bylaws provided for mandatory advancement of expenses incurred by present and former directors in connection with company-related litigation. In November 2005, the Troy Board amended the bylaws to remove the word "former" from the definition of directors entitled to advancement. In January 2006, Troy sued Bohnen for breach of fiduciary duties. Bohnen demanded advancement of his legal fees, claiming that his rights should be governed by Troy's bylaws as they existed when he took office as a director. The Court held, however, that a director's advancement rights are triggered at the time that he is named in a lawsuit, not at the time that he takes office as a director. Because Troy had not sued Bohnen at the time of the bylaw amendments, he did not have a vested right to advancement.

While it is possible that this case may be overturned by the Delaware Supreme Court, it should be a warning to directors that broad advancement and indemnification protections can be revoked by a subsequent unfriendly board. Companies should use this case as an opportunity to review with counsel their current director indemnification provisions. Among the options companies might consider are individual indemnification agreements between companies and their directors, which provide contractual rights to indemnification and advancement that cannot be unilaterally revoked. In addition, companies may consider amending their bylaws to prohibit retroactive amendments like the one the Schoon Court approved.

Contact Information
If you have any questions regarding this ruling, please contact Meredith Burbank, the principal drafter of this client alert, or you may contact the Womble Carlyle attorney with whom you usually work or one of our Corporate and Securities attorneys at the following link.

Notes
¹ C.A. No. 2362, 2008 WL 821666 (Del. Ch. March 28, 2008), available at http://courts.delaware.gov/opinions/(wd2ifs55gwfo2r552e4wir55)/download.aspx?ID=104940.

² The Delaware General Corporation Law permits Delaware corporations to indemnify directors for acts and omissions occurring during service as a director and authorizes such corporations to advance the legal fees and expenses a director incurs in defending a lawsuit. While this case addresses a change to the company's advancement provisions, it could have implications for indemnification rights generally.