Two news items on Monday (August 12), reminded us that now would be a good time for every company to review (and, if necessary, update) the protection it provides to its officers and directors through indemnification and D&O insurance.* First, the Delaware Chancery Court dismissed a lawsuit brought by two directors of a company seeking indemnification from the company for their legal expenses (William R. Huff, et al. v. Longview Energy Company). The second item was an article in Monday's New York Times, "Wall St. Debates Who Should Pay Legal Bills."  

The vestiges of the 2008-2009 economic meltdown include various ongoing litigation and regulatory enforcement actions against corporate officers and directors. With this risk fresh in our minds, an important exercise that officers and board members (with the assistance of corporate or outside counsel) should consider this year is a "What if?" scenario process that carefully reviews existing company D&O coverage and indemnification provisions to determine, among other things, whether the company will advance attorney's fees in various litigation and regulatory enforcement situations. This process is particularly important when you add to the scenario the possibility that the executive or director may become adverse in the middle of the process.

This Blog has spilled a lot of ink on the new types of litigation being brought against corporate officers and directors over executive compensation issues. In fact, all forms of litigation against officers and directors are on the rise. 

The Longview case might be a bad example because the facts were very unfavorable to the directors. "As a matter of undisputed fact, a Texas court entered a judgment against Huff, D'Angelo  .  . .  as a result of a breach of fiduciary duty committed by Huff and D'Angelo in connection with their usurpation of a corporate opportunity." A jury made a damage award of $95 million against Huff and D'Angelo and imposed a constructive trust in favor of the company on the profits and ownership of the disputed property. (Huff and D'Angelo have appealed the judgment of the Texas court.)

Nonetheless, the directors brought an action seeking indemnification on the ground that they there were "successful" within the meaning of 8 Del. C. § 145(c) because Longview had originally asserted eight counts against them, but ultimately decided at trial to just present a single straightforward breach of fiduciary claim for usurpation of corporate opportunity to the jury. The court was not impressed and dismissed the directors' claim, observing that "Huff and D'Angelo claim that they were partially successful despite suffering what on its face appears to be a devastating defeat."

Bottom line: The directors were not indemnified for their legal expenses. This is a topic too big for one Blog post, so I will follow up with more next week.

* Or maybe a good time for officers and directors to review the protection their company provides to them through indemnification and D&O insurance.