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The Case for Non-Discretionary Advancement Policies
You have recently been appointed General Counsel of a publicly traded Delaware corporation. A few months into your tenure, the Board asks whether the company should establish a policy for the automatic advancement of defense costs to officers or directors involved in company-related litigation. Your answer is that incorporating a non-discretionary advancement policy into the bylaws would be in the long-term best interests of the company.
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.
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