Corporate indemnification and advancement of legal expenses are distinct rights, with advancement being a narrower and more provisional contractual benefit. By relieving corporate officials from the personal financial burden of paying ongoing expenses arising from lawsuits and investigations, advancement is widely recognized as an important corollary to indemnification as an inducement to secure able individuals to corporate service.
The decision by a corporation to grant advancement of expenses incurred by an officer or director (and sometimes other employees and agents) in defending civil, criminal, administrative or investigative actions is essentially a decision to advance credit to corporate officials because amounts advanced to them must be repaid if it is subsequently determined that they are not entitled to be indemnified. But mandatory and unconditional advancement agreements can engender what one court called a “maddening” outcome: a corporate obligation to fund the legal expenses of an individual the board believes has acted against the interests of the corporation or even criminally.[FOOTNOTE 1] As recent decisions illustrate, it is worth pausing to consider the implications of mandatory advancement rights, as opposed to advancement grants in which the board retains some discretion to exercise business judgment on whether and how to condition the advancement of credit to corporate officials.
