Editor's Note . . .

Bad facts often result in bad law, whether made by a court or a legislature. The language of the holding resulting from the bad facts in Schoon v. Troy Corp. is bad law. During the director’s term of office, the corporation’s bylaws provided that “the Corporation shall pay the expenses incurred by any present or former director . . . reasonably incurred . . . in defending any threatened or pending Proceeding . . . in advance of the final disposition.” After the director “resigned due to health problems,” the corporation amended its bylaws to “delete former directors from entitlement to advancement.” The spouse of the former director, who had died in the interim, argued that a director’s right to advancement of expenses vests “when he took office” and that the corporation could not subsequently terminate that right without his consent. The court rejected that argument, holding that the right only vests upon “the date of the filing of the pleading against him.”

The court’s holding ignores a plethora of precedent that nothing should be done that will result in discouraging outside persons, especially those who are independent, from being directors. Oversight by outside persons is not only the best defense against mismanagement and fraud, but also the best offense for good management and governance. Persons deciding to become or continue as directors should be able to rely upon bylaw provisions in effect at the time of their decision to serve as directors.

Thanks to the holding of the court in Schoon, persons deciding to become or continue as directors of a Delaware corporation cannot rely upon any bylaw protection unless it is still in place at the time of a legal action against them. As discussed in the article by Kevin Kinross, “Do you want protection? – Better get it in writing,” the solution for directors of the Delaware corporation, and a consideration for directors of any corporation, before accepting or continuing any directorship, is to set forth their rights to indemnification in an indemnification agreement, separate of the bylaws, that is between the corporation and each director.

Although bad facts have apparently resulted in bad law in Delaware, corporations as well as directors should review their organization’s governing documents and consider separate indemnification agreements to ensure the willingness of independent persons to continue as directors.

Index to Acredula Spring 2008

The Crunch On Director Responsibility: A Storm is Brewing
Enterprise risk-management will turn the corporate focus to the duty of care.

Do You Want Protection? Better Get it in Writing
Discussion of a Delaware case suggesting the need for directors to set forth their rights to indemnification in an indemnification agreement, separate of the bylaws.

Thinking of Becoming a Director?
A checklist to assist anyone considering becoming a director to help facilitate their consideration of whether to accept the role.

Attributes of Quality Board Members: Asks Simple Penetrating Questions
Part Four of the continuing series on attributes of quality board members.

The “What” and “Why” of Advisory Boards
Discussion of why an advisory board is of value and the role of the advisory board.