Corporation Must Advance Defense Costs Despite Guilty Plea

In a recent decision, the Delaware Chancery Court required a Delaware corporation to advance a former director's costs of defending against a Securities and Exchange Commission insider trading lawsuit, despite the director's guilty plea in a related criminal case.¹ The Chancery Court's decision in Holley v. Nipro Diagnostics is a reminder that the Chancery Court will strictly enforce Delaware corporations' advancement obligations, even in cases involving admitted misconduct by the party seeking advancement. The decision also highlights the important distinction between a corporation's indemnification obligations (the ultimate obligation to bear certain defense costs) and its advancement obligations (the obligation to pay certain defense costs as they are incurred subject to repayment if the defendant is ultimately found not to be entitled to indemnification).

While an individual's right to indemnification for defense costs typically cannot be determined until after a claim is resolved, Delaware law broadly permits—but does not require—corporations to pay defense costs in advance, subject to an undertaking from the defendant officer or director to repay any amounts advanced if it is ultimately determined that the officer or director was not entitled to indemnification.

Many Delaware corporations agree to advance defense costs to directors and officers to the fullest extent permitted by Delaware law, viewing broad advancement agreements as essential to attracting talented management. When claims are actually asserted against directors or officers, however, corporations may resist advancing defense costs, particularly if the director or officer is accused of misconduct against the company or if the company believes that the director or officer will not likely be entitled to indemnification when the proceedings conclude.² As the Chancery Court's decision in Holley illustrates, having granted broad advancement rights to its directors and officers, a corporation will have difficulty escaping the obligation to pay defense costs, even where the defendant director or officer has admitted to misconduct against the company.