Indemnify Me, Maybe

A recent Delaware Chancery Court letter opinion is a reminder that directors, officers and their counsel should carefully review the mandatory indemnification and advancement of expenses language in their bylaws and indemnification agreements to ensure that they mean what they think the mean.
In Miller v. Palladium Industries, Inc. (Del. Ch. December 31, 2012, available at http://courts.delaware.gov/opinions/download.aspx?ID=182530), the Court dismissed an action for mandatory advancement of legal defense costs brought by a former director who was being sued by the corporation. The relevant provisions of the bylaws provided for mandatory indemnification and advancement of expenses; however, another section of the bylaws provided that expenses incurred in defending a proceeding “shall be paid by the corporation in advance of such proceeding’s final disposition unless otherwise determined by the Board of Directors in the specific case . . ..” Here, the Board had determined that the advancement of expenses was not in the best interests of the corporation for various reasons and denied the request.
The Court did not consider the two bylaw provisions ambiguous and construed them together: “Palladium must advance legal fees and expenses if the board does not adopt a contrary directive. . . . Failure of the board to act in a specified time after receipt of a request for advancement will leave the request as a mandatory one. Here, the board acted in a timely fashion – within roughly thirty days from the date of Miller’s demand.” As a result, the Court dismissed the former director’s claim for advancement of expenses.
So blow the dust off your bylaws and indemnification agreements, read the applicable language and make sure it says what you think it says.

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