The Delaware Chancery Court's decision in Schoon v. Troy Corp., 948 A.2d 1157 (2008), opens the door for companies to terminate unilaterally fee advancement and indemnification rights provided to corporate directors. Troy Corp. ("Troy") had originally provided these rights to both present and former directors, but then amended its bylaws in November 2005 after director William Bohnen retired, eliminating Troy's obligation to advance fees to and indemnify former directors, Bohnen included. Troy thereafter sued Bohnen, alleging breaches of fiduciary duty during his service as a director, and refused to advance fees to defend the suit. The Court upheld the refusal and held that Bohnen's rights did not vest by virtue of his directorship, but only upon his being named a defendant in a proceeding at a time when the bylaws provided for fee advancement and indemnification.
Schoon arguably gives Delaware corporations greater flexibility than was thought to exist in structuring the fee advancement and indemnification rights they provide to directors, and serves as a warning to directors that these rights may not endure. Companies could amend their bylaws to limit advancement and indemnification rights for extant, but not-yet-discovered or litigated, wrongdoing.
Companies seeking to cement rights to fee advancement and indemnification for events occurring during a director's tenure can amend their bylaws to make clear that current bylaw provisions will apply to those events, regardless of any future bylaw amendments, when those events are discovered or when a proceeding is commenced. Companies can also cement these rights by providing fee advancement and indemnification rights in their charters, requiring shareholder approval for amendment. Alternatively, directors may achieve greater protection by either signing fee advancement and indemnification agreements with the company or securing third party beneficiary and indemnification protection in merger or other transaction agreements, which are bilateral contracts and may not be rescinded unilaterally by the company.