Corporate Advancement of Executive Legal Fees: $2.1M in Legal Expenses Awarded to CEO/Director

Corporate Advancement of Executive Legal Fees: $2.1M in Legal Expenses Awarded to CEO/Director

Executives place themselves at considerable legal risk related to their work for the company. Executives may decline to serve as corporate officers or directors if they are expected to shoulder this legal risk themselves. To mitigate this risk and to encourage individuals to serve as executives, corporations often provide their officers and directors with indemnification and advancement protections. These protections, typically found in a company’s governing documents or in separate indemnification agreements, address who pays the executive’s legal fees if a dispute arises in connection with the executive’s role in the business. Advancement is related to, but also distinct from, indemnification: advancement requires the company to advance the executive’s legal fees during the legal dispute. Further, a company may be compelled by a court to pay those legal fees, often under expedited or summary proceedings. On the other hand, indemnification is typically owed after the legal dispute is resolved. Indemnification often requires a full trial or hearing to determine the executive’s ultimate right to receive the indemnity payment. During indemnification proceedings, the company can seek reimbursement of the advanced legal fees if it is determined that the executive was not entitled to ultimate indemnification of the advanced amounts. Companies can draft their indemnification and advancement clauses narrowly or broadly to fit the needs of the business.

From 2022 to 2024, Trépanier Tajima LLP led a multi-million dollar advancement case. The executive incurred millions in legal fees defending himself in multiple legal actions involving an LLC’s business and the executive’s involvement in that business. The LLC refused to advance legal fees to the executive. Trépanier Tajima LLP carefully cited the provisions of the LLC’s operating agreement to prove through binding interim arbitration proceedings that the executive was entitled to roughly $2.1 million in advancement of legal fees.

In opposition, the LLC argued that the executive was not entitled to advancement in any amount. The LLC claimed corporate malfeasance by the executive. Trépanier Tajima LLP demonstrated that the language of the operating agreement did not provide the LLC with such a defense. The defense was invalid because refusing to advance legal fees hindered the executive’s right to prove that his actions were lawful. The LLC next argued that the executive should not receive advancement because the executive was a plaintiff and not a defendant in many of the disputes at issue. The arbitrators found that the legal actions at issue were defensive of legal threats and demands made by the LLC, its officers, directors, and affiliates. The arbitrators declined to interpret the advancement provisions narrowly to deny coverage for affirmative actions designed to defend against legal threats.

As to the precise amount of advancement owed, the LLC argued that the arbitrators must review every line item of legal cost or expense. The LLC attempted to impose on the arbitrators a responsibility to determine the appropriateness of each of the legal fee. Trépanier Tajima LLP explained that under applicable case law, a granular review of advanceable expenses is neither required nor advisable in the course of summary or expedited advancement proceedings. Advancement case law allows an attorney’s certification to substantiate the amount owed because granular review can occur during a trial on the amount of indemnification owed and a potential refund of the advanced amounts. The arbitrators, agreeing with Trépanier Tajima LLP, relied heavily on Weil v. Vereit Operating P’ship, L.P., No. 2017-0613-JTL, 2018 Del. Ch. LEXIS 48 (Ch. Feb. 13, 2018) in determining the procedures and amount for advancement to the executive.