Corporate Directors' Statutory Right To Advancement of Attorneys' Fees Confirmed

Business Litigation & Corporate Law Update

Date: July 09, 2012

Overview

On July 3, 2012, the Ohio Supreme Court unequivocally held that a director is entitled to statutory advancement of attorneys' fees by the corporation that he or she serves, unless the corporation's articles or regulations specifically exclude advancement, even when the director is alleged to have acted intentionally, or in disregard of the corporation's right, or in breach of his or her fiduciary duties. Miller v. Miller, 2012-Ohio-2928. In so ruling, the court relied upon the explicit language of Ohio Revised Code Section 1701.13(E)(5)(a) and well-established Delaware law.

Advancement - an important precursor to indemnification - refers to the payment of attorneys' fees and expenses prior to the conclusion of the case and the ultimate determination of the director's right to be indemnified. The public policy reason behind the advancement of attorneys' fees is to encourage individuals to serve as corporate directors by addressing the concern that they will be forced to defend, at their financial expense, suits brought against them for actions taken as a director.

A corporate director's right to advancement, when it applies, does not depend on the merits of the claims asserted, as those issues are reserved for a later determination of the director's entitlement to indemnification. When advancement applies, the only qualifications are that the director must provide a written assurance of repayment, if it is later determined that he or she is not entitled to indemnification by the corporation, and that he or she must "reasonably cooperate" with the corporation.

Corporations Can Opt Out of Statutory Advancement

The statutory right of a director to the advancement of litigation expenses exists unless, at the time of the alleged wrongdoing, the corporation's articles or regulations specifically state that Ohio Revised Code Section 1701.13(E)(5)(a) does not apply to the corporation. Miller, 2012-Ohio-2928, ? 48. In other words, a director is entitled to statutory advancement rights even where the corporate bylaws and regulations are silent. Note that the mandatory advancement provision of the statute applies to directors, but not to officers or other employees.

Of course, existing or potential directors would likely view a corporation's decision to opt out of mandatory advancement as a serious disincentive to serve as a director, so opting out will rarely be a practical alternative for the typical corporation.

Corporations have some statutory authority for providing more expansive rights, such as by extending advancement to corporate officers as well as directors, but the courts have yet to delineate the boundaries of that authority.

Implications

Advancement provisions provide corporate directors with immediate interim relief from personally paying the significant expenses often involved in legal proceedings. As one may expect, the availability of advancement of attorneys' fees may significantly impact the course and strategy of any litigation. In addition, corporations are well advised to consider the potential operation of their existing indemnification and advancement clauses in advance of any related litigation.

The outcome of the Miller case clearly was compelled by the statute and the case record. Of course, there remain some open issues, such as what actions will be required by directors in different contexts to satisfy the standard of "reasonable cooperation."