Yates Memo Spurs Reviews of D&O Indemnification, Insurance

By Che Odom

Dec. 14 — The Department of Justice's focus on individual liability for corporate crimes is spurring directors and officers to push for measures that provide them with advancement of legal fees and the maximum indemnification possible, attorneys say.

“The Yates memo and economic pressures in some sectors, such as energy, are creating concern among individuals,” causing them to “prod companies to look again at their exclusions and expense advancement provisions,” Louis Goldberg, a partner in the New York office of Davis Polk & Wardwell LLP who focuses on corporate transactions, told Bloomberg BNA in an interview Dec. 14.

In a Sept. 9 memo, Deputy Attorney General Sally Quillian Yates directed federal prosecutors not to reduce penalties for corporations seeking settlement unless they disclose information about individual wrongdoers within their organizations. The change reportedly was in response to criticism that the government didn't do enough to punish wrongdoers in the financial crisis.

The memo is heightening concern among officers and directors about the adequacy of their insurance and other devices designed to protect them from government criminal and civil enforcement actions, Michael J. Biles, a securities litigation partner in the Austin, Texas, office of King & Spalding LLP, told Bloomberg BNA in an interview Dec. 14.

“Accordingly, we have seen an increased focus by officers and directors of public companies to make sure that their indemnification and advancement rights are mandatory,” he said.

Provisions Necessary

Often the individual, who is the target of prosecutors, has left the company even before the enforcement action occurs, Biles said.

“Unless the company has mandatory advancement and indemnification provisions in its bylaws, the company generally has no obligation to fund the defense of the government action,” he added.

Goldberg said that he is seeing directors and officers pushing for a review of such provisions in corporate bylaws, standalone agreements and insurance policies.

“Anytime there is something new, an event or development that makes people concerned about individual liability, they are going to press companies to look again to see if their provisions are state-of-the-art,” he said.

Look to Indemnification First

With a large company, such as Exxon Mobil Corp., indemnification is usually enough, but that is not true for smaller companies, Goldberg continued. “Only when the company becomes troubled or distressed, will you be looking to the insurance,” he said.

Directors and officers want to make sure the exclusions are properly written and that expense advancements allow for payments throughout the life of the case, so that the individual doesn't accrue attorneys' fees, he said.

Insurance Matters

Biles said his firm has seen an increased demand for provisions in director-and-office insurance that provide coverage directly to individual officers and directors when the company is “unable or unwilling to indemnify or advance attorneys' fees.”

Directors and officers should make sure they have mandatory, not permissive, advancement and indemnification rights under the bylaws and that they have sufficient insurance coverage as a result of the Yates memo, Biles said.

Also, they should ensure that the “bad acts” or “personal benefits” exclusions in their policies are only triggered upon a “final adjudication” of the facts underlying the exclusion, he added.

To contact the reporter on this story: Che Odom in Washington at codom@bna.com

To contact the editor responsible for this story: Yin Wilczek at ywilczek@bna.com