The Perils of Adjudicated Fraud
October 21, 2024
Publication| Corporate Transactions| Corporate Governance| Mergers & Acquisitions
Directors and officers of Delaware corporations often benefit from a robust suite of liability protections that generally include exculpation rights, indemnification rights, rights to recoup expenses incurred while defending a proceeding in advance of its final disposition (or “advancement” rights), and rights under director and officer (D&O) liability insurance policies. While each aspect of this so-called three-legged stool of executive protection—exculpation, indemnification/advancement, and insurance—often has different exclusions and exceptions, personal, monetary liability of individual directors and officers is exceedingly rare. For example, even if a company becomes insolvent or is prohibited from or unwilling to indemnify or advance legal fees on behalf of the executive, the executive may nonetheless be entitled to D&O insurance coverage for nonindemnified losses, protecting the individual from personal exposure.
But as the Delaware Court of Chancery’s recent post-trial opinion in InterMune v. Harkonen illustrates, these protections are not bulletproof. There, the Court of Chancery ordered the CEO and director of InterMune, Inc. to repay almost $6 million of advanced funds where the executive had been convicted of wire fraud and exhausted all appeals. As such, Harkonen serves as a reminder that, while only possible under an increasingly uncommon set of facts, “advanced sums sometimes must be repaid.”