By Adam Schwartz
So you are an officer or director of a company and you have been sued for some action (or inaction) taken in your corporate capacity. Does the company defend and indemnify you? In most situations, the company’s by-laws, and in some instances even Delaware statutes, require the company to provide defense and indemnification. But what happens if the company refuses?
Under Delaware’s corporate indemnification statute, you can sue to obtain the defense and indemnification to which you are entitled, but at what cost? Will you spend more suing the company than paying for your own defense in the underlying matter? Unless you can recover the attorneys’ fees you incur in suing the company (often referred to as “fees on fees”) it creates an incentive for the company to deny coverage in the first instance. Maybe you won’t bother suing. Maybe you won’t realize you can challenge the company’s decision to deny coverage. Whether you can recover “fees on fees” depends on your company’s by-laws and the state in which it is incorporated. Under Delaware law (8 Del. C. §145(a)) a corporation can indemnify any officer or director sued in their corporate capacity against “expenses, judgments, fines and amounts paid in settlement actually and reasonably incurred by the person.”
The Delaware Supreme Court has held that §145(a) should be broadly interpreted to further the goals it was enacted to achieve: (i) assisting corporate officials resist what they consider to be unjustified suits and (ii) encouraging capable individuals to serve as corporate directors. Thus, although §145(a) does not expressly permit “fees on fees,” the Delaware Supreme Court held that indemnification would be incomplete without an award of attorneys’ fees for the indemnification suit itself.
However, the court also noted that, while “fees on fees” are permissible under §145(a), they are not mandatory, and corporations can structure their by-laws to eliminate them.
Thus, you must first look at the company’s by-laws to determine if you are entitled to “fees on fees.” If the by-laws provide for “indemnification to the fullest extent allowed under the law,” a common phrase in corporate by-laws, then “fees on fees” are recoverable. However, if the by-laws exclude “fees on fees” or provide less indemnification than is permissible under §145(a), you may have to bear the cost of your attorneys’ fees.
Finally, even if you live in Delaware or the company has offices in Delaware, it is important to know your company’s state of incorporation because that state’s laws determine whether you are entitled to “fees on fees.” This is significant if, for example, your company is incorporated in New York. While New York has a corporate indemnification statue similar to Delaware’s, New York Courts have interpreted it to preclude “fees on fees” unless they are expressly permitted in the company’s by-laws. Thus, in New York, unlike Delaware, by-laws providing for indemnification to “the fullest extent of the law,” means “fees on fees” are not recoverable.
Adam Schwartz is a partner at Pashman Stein PC, a law firm based in Hackensack, NJ. His practice focuses primarily in the areas of insurance, business and commercial litigation. Schwartz can be reached at aschwartz@pashmanstein.com.
