Corporate advancement disputes often arise shortly after current management has concluded that the official seeking corporate funds for legal expenses has acted disloyally or even deliberately harmed the corporation. Must the board authorize payment of corporate resources to fund legal expenses of an official dismissed based on admitted criminal wrongdoing motivated by personal greed? Management understandably may be dismayed to learn the answer frequently is yes, because contractual advancement typically is provided under Delaware law granting corporations the power to indemnify and advance litigation expenses to any person made a party to a proceeding “by reason of the fact that the person is or was a director, officer, employee or agent of the corporation.”
A claim is “by reason of” corporate service when the allegations challenge conduct by the proposed indemnitee in his or her official corporate capacity. A lawsuit alleging that directors breached their fiduciary duties to the corporation is the archetypal suit for which directors are parties “by reason of” board service. “By reason of” is not construed so broadly, however, as to encompass every claim against a corporate official. Claims brought against officials in their personal capacity (such as excessive compensation and breach of a non-compete agreement) are not “by reason of” official capacity, so that indemnification usually is unavailable. This column examines Delaware case law providing a framework for applying the “by reason of” standard to claims that may implicate breach of a corporate official’s personal obligations owed to the corporation, as opposed to official capacity claims.
First Principles
