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Not a Moment Too ‘Schoon’; Delaware Directors May Now Rest Easy, as Amendment Overturns Controversial Case

Prepared by Barry A. Brust, Esq.
June 29, 2009

Effective August 1, 2009, the Delaware General Corporation Law will be amended to protect directors from retroactive elimination of the right to indemnification and advancement of expenses

In April 2009, Delaware approved several amendments to the Delaware General Corporation Law (“DGCL”). Among these amendments, which become effective on August 1, 2009, Section 145(f) of the DGCL will have new language to prohibit a corporation’s retroactive elimination of indemnification or advancement of expenses unless the relevant provision in the bylaws or certificate of incorporation expressly authorizes such elimination or impairment after the occurrence of the act or omission giving rise to indemnification or advancement of expenses.

Section 145(e) of the DGCL generally allows a corporation to advance expenses incurred by a director or an officer, or by a former officer or former director, in defending any civil, criminal, administrative or investigative action, suit or proceeding. However, a recent controversial decision of the Delaware Chancery Court, Schoon v. Troy Corp., 948 A.2d 1157 (Del. Ch. 2008), denied an advancement of a former director’s litigation expenses in a breach of fiduciary duty case because of a bylaw amendment adopted after the director resigned, even though the alleged wrongdoing that was the subject of the proceeding occurred before the adoption of the bylaw amendment. The Chancery Court upheld the bylaw amendment, holding that the former director’s right to indemnification or advancement of expenses did not vest until such former director was actually named in a suit in which an indemnifiable claim was asserted.

The new amendment to the DGCL effectively overrules the holding in Schoon and adds the following language to the end of Section 145(f): “A right to indemnification or to advancement of expenses arising under a provision of the certificate of incorporation or a bylaw shall not be eliminated or impaired by an amendment to such provision after the occurrence of the act or omission that is the subject of the civil, criminal, administrative or investigative action, suit or proceeding for which indemnification or advancement of expenses is sought, unless the provision in effect at the time of such act or omission explicitly authorizes such elimination or impairment after such action or omission has occurred.”

In response to the Schoon decision, many Delaware corporations amended their bylaws or entered into separate indemnification agreements to protect directors from such retroactive amendments. Now, with the August 1st amendment to Section 145(f) of the DGCL, a director’s right to indemnification or advancement of expenses will vest at the time of the subject act or omission, and such right may be eliminated or impaired after the occurrence of such act or omission only if the provision in effect at the time of occurrence explicitly authorizes such elimination or impairment. As a consequence, a director or officer of a Delaware corporation may now act in reliance on existing indemnification and advancement protections in the corporation’s bylaws or certificate of incorporation without any concern that these protections will be eliminated after the fact.

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The PN&M Legal Update is published as a service to our clients and friends. It is intended to provide general information and should not be acted upon without first obtaining professional advice appropriately tailored to your individual needs.