Corporation Required to Advance Legal Fees to Director to Defend Lawsuit Brought by the Corporation Against the Director

The Supreme Court of Ohio recently ruled that a corporation cannot avoid its duty under R.C. 1701.13(E)(5)(a) to advance the legal defense expenses of a corporate director who is sued by the corporation even when the alleged misconduct, if proven, would amount to a violation of the corporate director’s fiduciary duties to the corporation.

The case, captioned Miller et al. v. Miller, 2012-Ohio-2928, concerned Sam M. Miller, a director and co-owner of Trumbull Industries Inc., who was sued by two other directors of the corporation, Murray Miller and Sam H. Miller, for allegedly violating his fiduciary duties to shareholders and the corporation by participating in a new business venture to which Murray and Sam H. objected. The complaint sought injunctive relief and damages.

Sam M. subsequently sent a memorandum/undertaking to Murray and Sam H. notifying them that he had reimbursed himself from Trumbull Industries’ corporate funds for the costs he had incurred in preparing a defense against their lawsuit. Both sides then filed motions with the trial court seeking a determination as to whether Sam M. was entitled to the funds. The trial court ultimately ruled in favor of Sam M.

On appeal, the Eleventh District Court of Appeals reversed the trial court and held that Sam M. was not entitled to indemnification for his legal defense costs from Trumbull Industries. Sam M. sought and was granted Supreme Court review of the Eleventh District’s ruling.

In reversing the Eleventh District, the Supreme Court stated as follows: “Based upon the unambiguous language of R.C. 1701.13(E)(5)(a), we hold that Trumbull is required by law to advance expenses to Sam M. Trumbull’s articles of incorporation do not state by specific reference that R.C. 1701.13(E)(5)(a) does not apply to Trumbull. Thus we hold that appellees failed to show that Trumbull opted out of the mandatory advancement requirement. Finally, we hold that Trumbull’s statutory duty to advance Sam M.’s fees arose upon receipt of Sam M.’s undertaking.”

Corporate employers should be aware of this recent ruling and should review their articles of incorporation to ensure that company policies regarding payment of directors’ and officers’ legal fees are specifically addressed. If a corporation intends to opt out of the mandatory advancement requirement, the articles of incorporation must specifically reference that intention.

Contact: Alexander Kipp

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