The Case for Non-Discretionary Advancement Policies

A non-discretionary advancement provision would require the company to advance all legal expenses for any officer or director involved in any civil, criminal, administrative or investigative proceeding arising because the person is or was an officer or director of the company. Any advancement of defense costs would be conditioned upon their signing an undertaking to repay, as required by state law, and upon such other terms the company may choose to include in its advancement provision (see below). You know that advancing legal costs can be very expensive ' you have witnessed the dramatic increase in Department of Justice (DOJ) and SEC investigations into the conduct of officers and directors of public companies, not to mention the ever present reality of shareholder and derivative suits. Nevertheless, you think the risk of large legal bills is outweighed by significant potential benefits to the company.

The first benefit of a non-discretionary advancement policy is well-understood: In order to attract and retain highly-qualified officers and directors, a company needs to be willing to defend them should they come under investigation for actions taken in service of the company. Second, company support for the defense of a person who is being investigated or prosecuted for conduct while at the company allows that person to mount a full defense against any allegations of wrongdoing, with such defense possibly inuring to the company's benefit. Third, having a non-discretionary advancement policy prevents the DOJ or SEC from suggesting, subtly or not, that the company should not advance legal fees to the subjects of a particular investigation and from drawing an adverse inference about the company's cooperation with the investigation because the company is paying the legal fees of possible targets.