Payment of Legal Expenses:The Hidden Protections Available to Corporate Directors and Officers

Robert Royal,  |  March 16, 2017

Arizona law provides several significant protections to directors and officers.Their ability to receive reimbursements and advances for legal expenses is one such protection.1This often overlooked protection can dramatically affect the feasibility, outcome, and cost of litigation.

Arizona law permits both directors and officers to receive reimbursements and advances for legal expenses.Importantly, Arizona law does not limit their ability to qualify for these protections to those directors and officers currently serving a corporation.In fact, former directors and officers are entitled to receive the same protections.

The right to qualify for this unique protection is frequently triggered long before formal litigation is instituted.Directors and officers may be able to receive advances when an action is merely threatened.Moreover, this protection is not limited to civil cases; rather it may apply to pending actions or suits, formal or informal, and whether civil, criminal, administrative, or investigative.

Before receiving protection, a director or officer most likely has to establish the challenged conduct arises “by reason of the fact” or “because” he is or was a director or officer of the corporation, which can be difficult.If a formal complaint is on file, this critical determination can often be resolved by reviewing the claims and allegations within the pleading(s).If the allegations in the pleading(s) challenge the conduct in an “official” capacity, as opposed to an “individual” capacity, the test is often satisfied and the director or officer may qualify for protection.

Prior to seeking protection, a director or officer must comply with Arizona’s statutory requirements.First, if the corporation’s articles of incorporation eliminate liability for the challenged conduct, then a director or officer needs to provide the corporation with only a “written undertaking.”The written undertaking must affirm that the director or officer will repay the advanced and reimbursed fees if he is ultimately required to do so after final disposition.Arizona law does not require the undertaking to be secured.

Second, if the proceeding involves conduct for which liability has not been eliminated under a provision of the articles of incorporation, then the director or officer must take an additional step.In addition to providing the corporation with a “written undertaking” as described above, the director or officer must furnish a “written affirmation.”In this document, the director or officer must affirm his good faith belief that such conduct was made in good faith and that he reasonably believed: (i) in the case of conduct in an official capacity with the corporation, the conduct was in the corporation’s best interests; or (ii) in all other cases, the conduct was at least not opposed to the corporation’s best interests.If the challenged conduct is criminal in nature, the director or officer also must affirm he had no reasonable cause to believe the conduct was unlawful.

If litigation is on the horizon, savvy directors and officers know to consult an attorney and specifically inquire whether they are eligible for advancement or reimbursement of legal costs.Tiffany & Bosco has several attorneys knowledgeable in the area of officer and director liability who can aid in sorting out the issues.

1 See A.R.S. S 10-850 et seq.

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