A recent Minnesota district court held that officers and directors accused of wrongdoing against their corporations may have their defense costs advanced by the defenseless corporation.
Historically, the risk of personal liability for directors has been cited as presenting an obstacle to recruiting and retaining qualified individuals to serve as corporate directors. In large part to address this concern, Minnesota enacted a statute in 1981 that requires, as a default, the mandatory advancement of legal and other expenses by the corporation to directors, officers and employees made or threatened-to-be-made parties to proceedings by reason of their former or present official capacity if they satisfy the specified statutory standards. Minn. Stat. § 302A.521, subds. 2, 3. The statute stands for the proposition that the noblest of intentions sometimes result in unintended and harsh consequences.
Needless to say a corporation’s board is often surprised and corporate counsel chagrined when they discover that under the statute, a director, officer or an employee is entitled to have their defense costs advanced even when they have been accused by the corporation of misconduct. The right to mandatory advances –the funding of the entitled person’s legal fees and expenses as they are incurred – applies even when directors, officers or employees are accused (and in some cases proven guilty) of criminal conduct and/or corporate wrongdoing. Under the statute, the right to an advance is determined at the time the advance is requested. That request almost always occurs before the final adjudication of the issues in question.