Corporate bylaws often extend certain protections to former directors, including (for example) the advancement of litigation-related expenses to a director who is sued in connection with his or her corporate duties (a sort of “indemnity-inadvance”). However, the recent decision of the Delaware Chancery Court in Schoon v. Troy* suggests that such bylaws may not be sufficient to protect a former director.
In Schoon v. Troy, a former director of Troy Corporation (the “Company”) was sued in 2006 by the Company for breach of his fiduciary duty for actions taken while serving as a director from 1998 to 2005. During his tenure, the Company’s bylaws provided for the advancement of litigation-related expenses to present and former directors. However, subsequent to his resignation, the bylaws were amended to remove former directors’ right to advancement. The former director filed a separate action against the Company, seeking recognition of his right to advancement based on the bylaws which where in effect during his tenure as director.
The Court rejected the former director’s claim for advancement. The Court held that the former director’s rights were not defined by outdated bylaws, regardless of whether such bylaws were in place during his tenure on the Company’s Board. The former director’s right to advancement did not vest until he was named as a defendant in the action. As such action was commenced after the amendments to the Company’s bylaws, the former director was not entitled to advancement. The corporate bylaws governing a former director’s right to advancement are those in effect at the time the related litigation arises. The effect of this decision is that, generally, subsequent amendments to corporate bylaws can alter or eliminate any protections previously extended to former directors.
This decision seems highly logical. Corporate bylaws are, after all, constating documents intended to govern the affairs of a particular corporation rather than contractual agreements between a corporation and a particular director. It follows that corporate bylaws may be amended as a sitting Board of Directors deems fit. Accordingly, outgoing directors should be wary of relying on corporate bylaws that provide for advancement (or, for that matter, indemnity above and beyond that provided for in the OBCA, CBCA or other corporations legislation) as such bylaws are forever subject to amendment.
From a director’s standpoint, it is preferable to address advancement, indemnification and any other protections by way of a separate contract prior to accepting a position on a Board.