The Costs of Legal Proceedings That All Corporate Officers, Directors, and Corporate Counsel Should Consider
Arizona law provides several unique protections to directors and officers. Included among these protections is the ability for an officer/director to receive reimbursements and advances for legal expenses they may incur prior to a final disposition (the case ending). Not surprisingly, this protection can dramatically affect the feasibility, outcome, and cost of litigation.
Advancement for expenses is a much different concept than indemnification. Indemnification is retrospective, it routinely occurs after final disposition, and is frequently based upon facts developed during the proceeding. Advances for expenses, however, is prospective and occurs before a final disposition reached, which often limits the facts and findings available to the persons charged with determining whether to advance expenses.
Who, What, When, and Why of Advancement and Reimbursement of Legal Expenses
Who may qualify to receive reimbursements and advances?
Arizona law provides that both officers and directors may qualify to receive reimbursements and advances for expenses incurred before final disposition of a proceeding. Further, not only may directors and officers who serve the corporation qualify for protection, but former officers and directors may also qualify. In fact, if a former officer/director qualifies for advancements and reimbursement that former officer/director is entitled to receive the same protections as those actively serving a corporation.
In addition to directors and officers qualifying for advancements and reimbursement, a corporation may also provide these protections to its employees and/or agents. A corporation’s articles of incorporation, bylaws, resolution of its shareholders or board of directors, or a contract may specify the corporation’s employees or agents may also receive advancements and reimbursements for expenses incurred before final disposition of a proceeding.
What type of legal proceeding is required?
No particular type of proceeding is required. In fact, in Arizona and many other jurisdictions this unique cost-shifting protection applies to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative, or investigative and whether formal or informal. However, the proceeding should involve claims being asserted against the director, officer, employee, or agent in his/her official capacity.
When may advancements and reimbursements begin?
This cost-shifting protection is frequently triggered long before formal litigation is instituted. In fact, pursuant to Arizona statute, an officer/director may qualify to receive advances when an action is merely threatened. To the extent the corporation refuses to advance expenses, a litigant may petition the court and request an order be entered commanding the corporation to being advancing / reimbursing expenses.
Why does the law provide the ability to receive advancements and reimbursements?
Many state statutes (including Arizona’s) that govern advances for expenses reflect a determination that it is sound public policy to permit a corporation to advance expenses to a director / officer so long as the director / officer provides a written affirmation that his/her actions complied with certain standards of conduct. This policy is based upon the view that a person who serves an entity in a representative capacity should not be required to finance his or her own defense. The policy also encourages board membership and participation.
For more information on advancement / reimbursement of legal expenses you should consider contacting a licensed attorney.
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