Advancement and indemnification are distinct but related legal concepts. Both work in tandem to encourage corporate action by officers and directors for the benefit of the company without fear of personal liability. Indemnification is the company’s promise to reimburse executives for out-of-pocket expenses and losses incurred in defending themselves against claims arising from their corporate action. Indemnification alone is not sufficient in many situations as the company’s duty of indemnification does not get triggered until the end of a lawsuit, which could force the executive to pay out of pocket for what could be very costly litigation during the lawsuit. This is where advancement comes into play. Advancement provides immediate relief to ensure that executives have the necessary resources to defend against claims. Since most cases settle before trial, advancement provides executives with a greater benefit to allay costs. This column serves as a compliment to my earlier column discussing these topics.
Not all indemnification and advancement rights are created equal. While many companies provide broad and mandatory advancement rights to covered persons, some companies provide permissive advancement rights. Permissive advancement provides that the corporation may pay for the legal fees for executives in advance. Too many times, permissive advancement is advancement in name only as the advancement obligation is highly discretionary, which makes the advancement language perfunctory—i.e., companies have the discretion to make advancement anyway without the permissive advancement language. In situations where the executive is sued along with the company by a third party, advancement is much more likely to be provided to protect both parties. But in situations where a dispute arises between the company and the executive, permissive advancement language is sometimes useless. This is due in part to companies not wanting to advance funds to an officer or director they have sued for some alleged wrongdoing.
