September 09, 2008

Corporate Bylaws Requiring Officer Indemnification and Advances Of Defense Costs May Apply Even Where There Has Been Criminal Misconduct

Recent cases before courts in both Delaware and Minnesota demonstrate the breadth of a corporation's indemnity obligations. Under Delaware law, corporations can adopt bylaws requiring that their officers and directors be indemnified for actions taken in their official capacities, provided that they acted in "good faith." The Minnesota statute generally mandates indemnification in that event. Many assumed that a criminal conviction would be proof positive that the officer or director did not act in good faith and hence would not be entitled to indemnification from the corporation. Not necessarily so. On July 31, 2008, in a closely-watched case, the Delaware Chancery Court held that Sun-Times Media Group is required to continue to advance defense costs (which now exceed $70 million) to its former director Conrad Black while he appeals his federal criminal conviction for siphoning more than $100 million from the corporation. Black has undertaken to repay the corporation for his defense costs if his criminal conviction is affirmed. The Chancery Court concluded that Black's defense costs must be advanced until there is a final, non-appealable ruling that Black had been dishonest or disloyal. And, in a June 26, 2008, decision, Augustine v. Arizant Inc., the Minnesota Supreme Court concluded that an officer's guilty plea to aiding and abetting criminal violations of the federal Medicare statute did not necessarily mean that the officer had acted in bad faith. The Court held that the officer was entitled to a jury trial on whether the corporation should be required to indemnify him for both his criminal fine and his criminal defense costs.

The Faegre Drinker Biddle & Reath LLP website uses cookies to make your browsing experience as useful as possible. In order to have the full site experience, keep cookies enabled on your web browser. By browsing our site with cookies enabled, you are agreeing to their use. Review Faegre Drinker Biddle & Reath LLP's cookies information for more details.