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Showing 10 posts in Indemnification.
Last week, American Apparel announced that its board had decided to terminate Dov Charney, the company’s founder, CEO, and Chairman, “for cause.” (We’ve discussed the meaning of terminations “for cause” in prior posts here and here.) The board also immediately suspended Charney from his positions with the company. Although the board didn’t initially disclose the reasons for its action, Charney is not new to controversy; in recent years, he has faced allegations of sexual harassment and assault.
The reasons for Charney’s termination have now become public, and they aren’t pretty. In its termination letter, available here, the board accuses Charney of putting the company at significant litigation risk. It complains that he sexually harassed employees and allowed another employee to post false information online about a former employee, which led to a substantial lawsuit. The board also says that Charney misused corporate assets for “personal, non-business reasons,” including making severance payments to protect himself from personal liability. According to the board, Charney’s behavior has harmed the company’s “business reputation,” scaring away potential financing sources. Read More ›
Earlier this week, we outlined the rights of indemnification and advancement, and discussed how those rights can hinge on the statutory law governing a corporation and the private agreements that companies enter into with their officials. In this post, we review a recent decision to see how these principles apply in real life.
The decision comes from Vice Chancellor Sam Glasscock III of the Delaware Court of Chancery. Because many companies are incorporated in Delaware, the Delaware courts handle some of the most preeminent disputes involving corporate law, and they have significant experience addressing issues of indemnification and advancement.
The Vice Chancellor’s opinion illustrates a judicial view that companies sometimes agree to broad rights at the outset of an employment relationship, but then seek to back away from those agreements once a dispute arises. He wrote:
It is far from uncommon that an entity finds it useful to offer broad advancement rights when encouraging an employee to enter a contract, and then finds it financially unpalatable, even morally repugnant, to perform that contract once it alleges wrongdoing against the employee.
Vice Chancellor Glasscock’s ruling also shows how courts will review the governing statutes and agreements in order to decide whether a company’s denial of advancement is legally justified.
This particular dispute, Fillip v. Centerstone Linen Services, LLC, 2014 WL 793123 (Del. Ch. Feb. 20, 2014), involved Karl Fillip, the former CEO of Centerstone. Fillip resigned, claiming that he had “Good Reason” for the resignation under his employment agreement and therefore was entitled to receive certain bonuses and severance pay. When Centerstone wouldn’t pay up, Fillip sued it in Georgia state court, alleging breach of contract and also seeking a declaratory judgment that restrictions in his employment agreement were invalid. Centerstone then filed counterclaims, which triggered a response from Fillip for advancement of funds to defend against those claims.
Centerstone, as you might imagine, was not happy about this turn of events. It refused his request, but also said it would withdraw certain counterclaims because it didn’t want to pursue claims “that could potentially trigger an obligation by Centerstone to pay Mr. Fillip’s attorney’s fees and costs in defending them.” Dissatisfied, Fillip sued in Delaware for advancement of his fees. Read More ›
Imagine sitting on the board of directors of a Fortune 500 company. You might think it’s a life of corporate jets, cushy board meetings, and prestige. (Although, the press will tell us, it’s not really that way anymore, thanks to Enron.) But even if corporate service would truly be the good life, what would happen to you if an aggrieved shareholder sued you for allegedly breaching your fiduciary duties to the company? Would you have to deplete your bank account to pay expensive lawyers for years of costly litigation?
The answer is found in the rights of indemnification and advancement (which we have previously discussed here, here, and here in connection with a trade secret case against a Goldman Sachs employee). Indemnification and advancement are two overlapping, yet different, rights that corporate directors, officers, and employees may have when it comes to the payment of their legal fees in lawsuits brought against them because of their corporate service.
Indemnification is the reimbursement of fees after those fees have been incurred. This right, as the Delaware Supreme Court has written, “allows corporate officials to defend themselves in legal proceedings secure in the knowledge that, if vindicated, the corporation will bear the expense of litigation.” The words “if vindicated” cannot be emphasized enough – they show that in order to establish a right to indemnification, the officer may have to prevail in the proceeding.
Advancement, meanwhile, is exactly what it sounds like: payment of fees by the company in advance of the final resolution of the proceeding. Advancement is an important companion to the right of indemnification, because it provides officials with immediate relief from the financial burden of investigations and legal proceedings. No vindication required – although the official may have to pay back what she receives if the final decision doesn’t go her way.
To determine an individual’s right to indemnification or advancement, courts will first look to the statutes governing the business, which may either require or permit those rights. Because many companies are incorporated in Delaware, we’ll take a look at what Delaware law has to say on this subject. Read More ›
Former CEO of BDO Is Stuck with Arbitrator's Decision That BDO Does Not Have to Indemnify Him in Criminal Case
Earlier this week, a New York state court declined to second-guess an arbitrator’s decision that BDO, USA does not have to indemnify or pay the legal bills of its former CEO, Denis M. Field, in his criminal case.
As we have noted here before, the first battle in a legal dispute between a company and its former executive is often over whether the dispute will be decided by a judge (and, ultimately, a jury) or a private arbitrator. Field v. BDO underscores why the stakes for that battle are so high: if you don’t like the arbitrator’s decision, you almost certainly will be stuck with it. That’s because the standard that courts apply in reviewing arbitrators’ decisions – even decisions about what the law requires – is a very forgiving standard. By contrast, the standard that appellate courts apply in reviewing trial judges’ decisions is less forgiving, which means that losers in the courts have a better shot at reversing decisions they don’t like than losers in arbitration. Read More ›
The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Act”) required every public company to disclose its incentive-based compensation and to adopt a policy to recover from current and former executives, in the event of a restatement, any such compensation that would not have been awarded under the restated financial statements. As a result of the Act, many public companies in America have adopted new compensation “clawback” policies, even though the SEC has yet to promulgate regulations as required by the statute and there is no effective date for implementing these requirements. Read More ›
It's A Wonderful Life...Or It Will Be If George And Uncle Billy Can Get Their Legal Fees Paid, Part 2
From the script for It’s A Wonderful Life (1946):
Hope you enjoy it.
George suddenly sees the old cigar lighter on the counter.
He closes his eyes and makes a wish.
Oh... Oh. Wish I had a million
As he snaps the lighter the flame springs up.
Can George’s wish for a million dollars (or more) actually be granted, when he and Uncle Billy may need it the most? Read More ›
“Where’s that money, you silly, stupid old fool? Where's that money? Do you realize what this means? It means bankruptcy and scandal and prison! That’s what it means! One of us is going to jail... well, it’s not gonna be me!”
Who doesn’t remember those words from It’s A Wonderful Life, Frank Capra’s classic 1946 movie that gives small-town building-and-loan president George Bailey (Jimmy Stewart) the chance to see what the world would have been like if he had never been born. Throw in an angel trying to earn his wings and great performances by Lionel Barrymore and Donna Reed, soak it in so much populism J. Edgar Hoover called it communist, and you have a wonderful holiday tradition (despite the movie’s unique history in copyright law).
Anyone who has seen this movie remembers the ending. After Bailey’s forgetful Uncle Billy (Thomas Mitchell) loses an $8,000 bank deposit, Bailey is threatened with arrest and his small building-and-loan is out of cash and facing collapse (their search for the missing money leads George to say the lines at the top of this piece – and for an explanation of why a building-and-loan needed to deposit its money in the bank in the first place, see here). George’s goodwill with his customers and friends, however, leads them all to answer his wife’s call for a ground-up bailout of the bank. Impressed, the bank examiner even puts a few of his own dollars into the bailout fund, and the sheriff rips up the warrant that Old Man Potter had sworn out for his arrest.
Over the years, of course, there have been some other suggested endings – including this one from Saturday Night Live.
I’d like to hypothesize another alternative ending, and use it to answer some questions that executives should consider. Even if they don’t run their business using strings tied on their fingers. Read More ›
Does a Company Have to Advance Legal Fees for a Former Officer Who Was Criminally Charged (Twice) with Stealing the Company's Trade Secrets?
We previewed this question on Monday, in our first of three posts (see here, too) about the lawsuit recently filed by former Goldman Sachs vice president Sergey Aleynikov, who beat back a federal prosecution and is now fighting state criminal charges for allegedly stealing the investment bank’s "secret sauce" computer code. Aleynikov seeks a court order directing the investment bank to not only indemnify him for the attorneys’ fees that he incurred in the now-concluded federal case (the subject of Monday’s post), but also advance his attorneys’ fees as the ongoing state case (the subject of today’s post) proceeds.
Indemnification and advancement are similar but distinct concepts. They both involve a company paying (or reimbursing) the legal fees of a current or former officer or director pursuant to a state law, a company bylaw or a contract, but they differ with respect to the timing of payments and the conditions that must be met before payment begins. Read More ›
My colleague Ellen Marcus has written a great piece about Sergey Aleynikov, a vice president and computer programmer at Goldman Sachs who allegedly stole its proprietary computer code as he was heading out the door to work at a competitor. Aleynikov was indicted and convicted for breaking Federal law when he did so – but a Federal appellate court overturned his conviction. Now, though, he’s about to face New York State charges for the same alleged theft. Aleynikov has sued Goldman Sachs, arguing the investment bank has an obligation to reimburse him for the legal fees he’s already incurred (indemnification) and pay his new legal bills as he fights the state charges (advancement).
Ellen noted in her piece that the Aleynikov story “illustrates key concepts about indemnification and advancement.” There is, though, another piece of this puzzle that the Aleynikov matter also illustrates. Read More ›
Does a Company Have to Pay for the Defense of a Former Officer Who Was Criminally Charged (Twice) with Stealing the Company's Trade Secrets?
That’s the question presented by a recent lawsuit filed by Sergei Aleynikov, a computer programmer who was a Vice President at Goldman Sachs responsible for code relating to Goldman’s high frequency trading business (more on “HFT” here) before he left to work for a hedge fund – allegedly bringing Goldman’s “secret sauce” code with him. We’ve observed before that contractual rights to indemnification can sometimes lead to head-scratching results, but, depending on the outcome, this case may take the cake. Plus, it nicely illustrates key concepts about indemnification (our focus today) and advancement (our focus later this week). Read More ›