The following is a reposting of the Advancements of Fees for Former Officers written by Brett M. Amron, Development Chair of the D&O Liability Committee for the Business Law section of the ABA.
In Marino v. Patriot Rail Company LLC, C.A. No. 11605-VCL (Del. Ch. Feb. 29, 2016), the Delaware Court of Chancery confirmed that, under Section 145 of the Delaware General Corporation Law (the “DGCL”), the advancement and indemnification rights of officers and directors for actions taken while serving in that capacity: (i) continue after an officer or director leaves office; (ii) do not cover actions taken after an officer or director leaves office; and (iii) cannot be amended or eliminated retroactively unless the source of such rights explicitly provided otherwise at the time coverage was authorized or ratified. The opinion is also noteworthy for underscoring the importance of parties addressing how to deal with the issue of contingent liabilities—for example, pending litigation—in connection with the purchase of a company.
Patriot Rail involved an underlying suit between Patriot Rail Company, LLC (the “Company”) and Sierra Railroad Company (“Sierra”), which ended in favor of Sierra. Sierra moved to amend its judgment to add Gary Marino, the former Chairman, President and CEO of the Company, as a judgment debtor. Marino sought advancement from the Company to cover the legal expenses he would incur to defend against Sierra’s efforts to add him as an individual party and collect against him as a judgment debtor. When the Company denied his request, Marino commenced this action seeking advancements of attorneys’ fees and expenses; the Company answered, and the parties cross-moved for summary judgment.
Article VIII of the Company’s certificate of incorporation stated: “This Corporation shall indemnify and shall advance expenses on behalf of its officers and directors to the fullest extent permitted by law in existence either now or hereafter.” The parties agreed that had Marino been sued by reason of his status as an officer while he was serving in that capacity, the Company would have been obligated to provide advancements. The issue, instead, was whether this language in the Company’s charter continued to cover Marino for the same types of claims after he ceased serving as an officer.
Because the Company’s charter contemplated advancement “to the fullest extent permitted by law,” the answer turned on the language of Delaware’s indemnification and advancement statute. 8 Del. C. § 145. After looking at the statutory history of Section 145 and case precedent, the Court held that Marino was entitled to the requested advancements for actions he had taken while serving in his capacity as an officer of the Company.
The Court paid particular attention to three subsections of Section 145: Section 145(e), which authorizes advancement; Section 145(j), which addresses the extent to which a covered person’s indemnification and advancement rights for actions taken during the person’s period of service continue after the person has ceased to serve; and Section 145(f), which limits a corporation’s ability to cause a covered person’s rights to terminate after the person has served in reliance upon them.
The Court explained that Section 145 authorizes a corporation to grant mandatory advancement rights to officers and directors that provide coverage conditioned solely on an undertaking (Section 145(e)). Such rights provide coverage for actions taken by individuals during their service, even after the individuals have ceased to serve, and continue to provide coverage unless the governing provision specifically states otherwise (Section 145(j)). Moreover, unless the governing provision provides otherwise, the granted rights cannot be altered or eliminated retroactively with respect to prior actions, after a director or officer has already exposed themselves to liability by acting on the corporation’s behalf (Section 145(f)).