Companies routinely offer indemnification and advancement rights to their directors and officers, but quite often those rights are reduced to written statements appearing in multiple corporate documents, including articles of incorporation, bylaws, employment agreements and indemnification agreements. If the wording differs from one document to the next, the result can be conflicting provisions and confusion over which document prevails.

This was the issue facing the Delaware Chancery Court in Xu Hong Bin v. Heckmann Corp. There, a former director embroiled in litigation with his former employer asserted that the corporation was required to advance his expenses (i.e., pay his attorney’s fees and court costs) pending a final ruling in the lawsuit. The former director relied on the corporation’s articles of incorporation, which required the corporation to advance expenses to its officers and directors to the fullest extent permitted by law. The corporation recognized that the director had the right to advancement, but the corporation relied on the bylaws, which stated that the corporation could impose reasonable terms and conditions before advancing expenses. Earlier this month the Court resolved the dispute. See Letter Opinion, No. 4802-CC (Del. Ch. Jan. 8, 2010). While Delaware law provides that a corporation’s articles of incorporation trump a conflicting provision in the bylaws, the Court held that it was required to, and could, reconcile the two provisions. The Court conceded that the articles of incorporation could have been better drafted, but it concluded that the corporation could create the right to advancement in its articles, while at the same time reserve the right in the bylaws to impose reasonable conditions on the advancement of expenses. Consequently, it ruled in the corporation’s favor.

Although the Xu Court found a way to reconcile two seemingly inconsistent advancement provisions, companies would be well served to proactively conduct a review of their indemnification and advancement provisions to ensure that they are consistent before any litigation over their compatibility arises. Doing so would provide certainty to both the corporation and its directors and officers about the extent of the corporation’s obligation to indemnify and advance expenses to its directors and officers.

http://www.delawarelitigation.com/uploads/file/intCF.PDF