On July 3, 2012, the Ohio Supreme Court issued an important and long-awaited decision regarding the advancement of legal fees to corporate directors defending lawsuits brought against them. Miller v. Miller, Slip Opinion No. 2012-Ohio-2928. The full text of the opinion is here. Chief Justice Maureen O’Connor authored the Court’s 6-1 majority decision.
The Ohio General Corporation Law has long required Ohio corporations to advance legal fees to directors who are sued for actions taken in their capacity as directors in advance of any determination that the directors are entitled to indemnification. Notwithstanding unambiguous statutory direction, in Miller, the Court of Appeals held that a director sued for breach of his fiduciary duties and the usurpation of a corporate opportunity was not entitled to advancement of expenses because the director’s actions constituting the alleged breach of his fiduciary duties were not actions taken on behalf of the corporation.
The Ohio Supreme Court reversed the appellate court’s decision holding:
- Advancement does not depend on a future right to indemnification. The court held that the advancement of fees is neither determined by nor dependent upon whether a director is ultimately entitled to indemnification. Advancement of expenses and indemnification are separate and distinct rights. “[A] corporation cannot avoid its duty to advance expenses to a director under R.C. 1701.13(E)(5)(a) by claiming that the director’s alleged misconduct, if proven, would amount to a violation of his or her fiduciary duties and would therefore foreclose indemnification.” Because “[e]ntitlement to indemnification of expenses is an entirely different issue, separate and apart from entitlement to advancement of expenses,” the Court would not even review the “issue of whether [the director] violated his fiduciary duties and, therefore, is not entitled to indemnification . . . .”
- Advancement is mandatory unless the company’s articles say otherwise. The Court pointed out that in R.C. 1701.13(E)(5)(a) the legislature provided that a director’s expenses “shall” be paid by the corporation, making advancement of a director’s expenses by a corporation mandatory. The Court further held that when a corporation has received a director’s undertaking to reimburse if the director were ultimately found to have breached, the corporation is required to advance expenses to the director unless the corporation’s articles or regulations specifically state that R.C. 1701.13(E) does not apply to the corporation.
- Advancement may be required even though the director is accused of harming the company. The Court held that advancement is required even when the corporation and director are at odds in litigation. “[T]he duty to advance expenses often ‘requires companies to advance the cost of defending claims that allege wrongs to the companies, even lawsuits brought by companies themselves against former officers and directors.’”
The Miller decision is an important development in Ohio corporate law. It will impact companies and directors alike and provides clarity to R.C. 1701.13(E)(5)(a). If you have any questions regarding the decision in Miller or related issues, please contact your principal Squire Sanders lawyer or one of the lawyers listed in this Alert.