You are Sued in Your Role as Officer or Director of a Massachusetts Corporation, Who Pays Your Fees and Expenses?

It is not unusual, and perhaps even typical in Massachusetts, that officers and directors of Massachusetts corporations are named as parties to lawsuits, either instead of the corporation or along with the corporation which they serve. The reasons for naming individual officers and directors in suits are many and, for the most part, are permissible. The types of corporate lawsuits in which an officer or director might find himself/herself named as a defendant, include:

• Claims of breach of fiduciary duty between shareholders;
  
• Claims of breach of fiduciary duty, mismanagement or fraud in stockholder derivative lawsuits;
  
• Certain environmental lawsuits;
  
• Employee related lawsuits for discrimination, wrongful termination or misrepresentation.

If an officer or director is sued, who pays their costs, expenses (or, if unsuccessful, any judgment which may be entered by a court)? As business corporate and business litigation lawyers we are frequently asked this question by our clients, but too often only after a lawsuit is filed. Our answers fall into several categories:

Directors and Officers Liability Insurance

Those who have planned appropriately may have directors and officers liability insurance which will cover most, but not all, lawsuits against corporate officers and directors. Good corporate lawyers will recommend D&O insurance, because even in situations where an officer or director is indemnified, either by law or by the provisions of the corporation’s governing documents, the indemnification merely shifts the financial burden from the individual director or officer to the corporation. Substantial legal expenses can drain the corporation, if it must indemnify the directors and officers. (It is important to note that in Massachusetts, lawsuits against officers and directors often name more than one officer or director, and each may retain his or her own attorney.) A D&O policy is thus, just as important as a business general liability insurance policy, in terms of ultimate financial burden.

Massachusetts Corporate Law

Massachusetts General Laws Chapter 156D, governs a company’s indemnification obligation to its officers and directors. Under the law, there is only one mandatory indemnification provision. Under Section 8.52, a corporation must indemnify any officer or director who is “wholly successful” in defending litigation. Thus, if the company president is sued, and he is found not to be liable for the claims in the lawsuit, then the corporation must indemnify him, by refunding his reasonable legal expenses.

Corporate By-laws

Our Massachusetts corporation law also makes provision for permissible indemnification, which a corporation may elect to adopt, but which is not mandatory.

The requirements for permissible indemnification, as set out in Massachusetts General Laws Ch. 156D, Section 8.51, are as follows:

(a) Except as otherwise provided in this section, a corporation may indemnify an individual who is a party to a proceeding because he is a director against liability incurred in the proceeding if:

(1)(i) he conducted himself in good faith; and

(ii) he reasonably believed that his conduct was in the best interests of the corporation or that his conduct was at least not opposed to the best interests of the corporation; and

(iii) in the case of any criminal proceeding, he had no reasonable cause to believe his conduct was unlawful; or

(2) he engaged in conduct for which he shall not be liable under a provision of the articles of organization authorized by clause (4) of subsection (b) of section 2.02.

(b) A director's conduct with respect to an employee benefit plan for a purpose he reasonably believed to be in the interests of the participants in, and the beneficiaries of, the plan is conduct that satisfies the requirement that his conduct was at least not opposed to the best interests of the corporation.

On the theory that corporations may not be used to reward bad faith behavior, corporations are not permitted to offer indemnification which is broader than that provided above.

It is important for corporate officers and directors to review their articles of organization and bylaws and determine whether 1. they contain indemnification provisions and 2. whether those provisions comply with Massachusetts law. A skilled Massachusetts business lawyer will be able to assist you and your company in planning for potential lawsuits way before they occur.

The foregoing is an overview of corporate indemnification options in Massachusetts but is neither intended to be exhaustive or to constitute “legal advice” Should you wish to obtain more information about this or any other Massachusetts corporation law topic, call Barry S. Scheer, business law/litigation practice group director at (617) 886-0500 or contact him via the website.

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For more information on Massachusetts business law or if you are seeking an business lawyer for any other needs, please contact Barry Scheer. If you prefer, you can also telephone our offices in Boston seven days a week at toll free 866-414-0400.

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