Advance or Perish

Corporate Governance

For those who have been following my blog, it goes without saying that I have come to the conclusion that high-level executives are being unfairly targeted in today’s business environment. In fact, those who work in or around the C-Suite have huge targets on their backs, from regulators, plaintiffs’ attorneys, and law enforcement officials alike.

It is very likely that during the career of a C-Suite executive, he or she will become involved in some sort of litigation or investigation. This is the new normal. When I started as a lawyer over 30 years ago, everyone would say that litigation was a cost of doing business. Now, it’s all about going after high-level managers, who have become scapegoats for any number of politically-motivated policymakers or greedy advocates. Just read the newspapers or watch the news.

C-Suite executives require substantial resources to fight back against litigation or government investigations. In many of my cases, the expert fees alone are counted in the millions of dollars. No one can afford this cost alone. Fortunately, there are ways to protect C-Suite executives and ensure that their rights will be protected: advancement, indemnification, and insurance.

Under most state laws, companies may, but are not required to, advance the cost of litigation and investigations on behalf of their employees. In other words, as long as the executive did not act contrary to corporate interests, the company may pay for lawyers and experts.

For their own protection, C-Suite executives should insist that the corporate bylaws and any contractual agreement with the company provide for mandatory advancements, and not leave the issue to the company’s discretion. There should be no doubt that the company will be there to support the C-Suite with resources in the event of any litigation or investigation. Otherwise, executives are exposed and vulnerable, and may not be able to fight back.

Indemnification, in contrast to advancement, involves a statutory or contractual right to be compensated for expenses, but only after the litigation or investigation is over. Indemnification is great if you can shell out millions of dollars on your own until the case is over, but as a practical matter, that may be too late. C-Suite executives have to insist on advancement protection so that there is no question that during an investigation and litigation their rights will be protected and their expenses paid by the company.

Another way of protecting yourself is through directors and officers insurance. This is commonly known as “D & O” insurance. In my experience, C-Suite executives rarely check this insurance until an emergency arises. As you can imagine, policy coverage varies and often does not provide for full and adequate protection. Needless to say, the time to examine such policies and provide for high-ranking executives is well before any litigation or investigation begins.

I recently read a court decision from Delaware, which is a state that is very protective of C-Suite executives’ rights. The case is Blankenship v. Alpha Appalachia Holdings, Inc. The facts are somewhat typical. A CEO was promised advancement during an intense government investigation. Fortunately, the company bylaws and the CEOs contract confirmed advancement rights. However, as part of the process of advancement, the company requested an undertaking letter in which the executive represented that he had done nothing wrong and acted in the best interests of the company.

Several months went by, the company was sold, and, of course, new management took over. The CEO became the former CEO, and he lost control over corporate decision-making. The new group tried to say that the former CEO had misrepresented facts in the undertaking, and therefore the company would not advance legal expenses. This was done immediately after the former CEO was indicted and most in need of representation.

Fortunately, the court rejected the company’s position and held that the former CEO was entitled to continued advancements during the litigation. This was the right decision, and the court articulated how important it was for companies to be able to attract highly skilled individuals by providing adequate advancement and indemnification rights.

The case, though, provides an important lesson. All C-Suite executives should insist that their general counsel (or even better, outside counsel) review state law, corporate bylaws, and employment contracts, to ensure full and complete protection in the event of litigation or investigation. Further, executives and counsel should consult with insurance brokers to make certain that D & O coverage is complete. It may be way too late to take these protective steps after a plaintiff’s lawyer or aggressive prosecutor comes knocking.


Remember, be careful out there.

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