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Advancement Versus Indemnification

A lawsuit is all about positioning. Plaintiffs start with the power – they choose the who, the what, the when, and where of an action.  Plaintiff always wants to maintain control.  Defendant seeks to shift the center of gravity in a lawsuit – to stop the Plaintiff’s momentum.  That major shift in the balance of power in a lawsuit can arise when a claim for advancement is made by a party. Advancement and indemnification are contractual obligations found in the corporate formation documents or other governing agreements that are agreed upon between equity-holders, corporate officers, and the corporation. While the legal proceedings that often take place concerning corporate matters can be complex and costly, some companies agree to indemnify their officers and directors for their litigation costs after the expenses have been incurred. Others commit to paying these expenses in advance.

What is the Difference Between Advancement and Indemnification?

Advancement is a provision included in corporate documents that permits, or requires, a company to pay the legal fees of an officer or director while a lawsuit is progressing. Advancement is a concept that is distinct from indemnification, which allows the covered party to recover the money they spent defending the claim. The right to advancement does not depend on the right to indemnification — and it does not impact the underlying legal action.

Unlike advancement, which provides immediate relief upon answering a complaint but may need to be paid back, indemnification relies on the success of the merits of the case. While indemnification is a right for which you can get your costs and your losses at the end of litigation for your legal fees. Indemnification does not include punitive damages or apply to gross negligence, intentional torts, or criminal matters. If a corporate officer or director is held liable for punitive damages, gross negligence, intentional torts, or criminal matters, they will not be indemnified for their expenses.  

When is Advancement or Indemnification Permitted in a Lawsuit?

The analysis for whether a court should allow an advancement of legal fees is straightforward. Whether advancement is permitted or required per a contractual provision typically turns on two procedural prerequisites: 1) The corporate officer or director must show a genuine issue of law or fact exists, and 2) They must demonstrate that they were sued in their corporate capacity, rather than their individual capacity. In the event a defendant is sued in both their corporate and individual capacity, the court might limit an award to only the fees for the defense of the claims concerning the corporate conduct.

Advancement and indemnification may be granted pursuant to the following corporate documents:

  • The certificate of incorporation
  • The corporate bylaws
  • A resolution of the shareholders
  • A resolution of the directors
  • An agreement providing for the advancement or indemnification

Provisions allowing for advancement and indemnification may also be provided in a corporate contract.

Contact an Experienced New York Corporate Transactional Lawyer to Learn More

If you’re a business owner, it’s crucial to be able to identify advancement and indemnification provisions and understand how they will impact your company should a former corporate officer be in an adverse position. The New York corporate transactional lawyers at Brinen & Associates are dedicated to assisting clients with a wide variety of corporate matters and helping ensure the interests of their businesses are protected. Call (212) 330-8151 or send us a message to learn more about our legal services. 

We also offer a free webinar to corporate owners to help them understand the purpose of advancement and indemnification provisions — and how to safeguard their businesses. 

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