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Banking & Finance Law Report

Ohio Supreme Court Rules On Duty of Corporations to Pay the Litigation Expenses of its Directors

Posted in Corporate Governance, Corporate Law

Ohio corporations should carefully consider whether their articles of incorporation or code of regulations should state that Ohio Revised Code §1701.13(E)(5)(a) does not apply to the corporation. Without making that exclusion, the lack of an indemnity agreement will not prevent a director from exercising his statutory right to receive (from the corporation) payment of his litigation expenses.

Corporations and their directors often enter into indemnity agreements. These agreements usually state that the company will reimburse the director for certain expenses (such as legal fees) incurred by the director as a result of his or her status as a director. But Miller v. Miller, a recent decision by the Ohio Supreme Court, makes clear that even without an indemnity agreement, Ohio corporations have (unless otherwise stated in their articles of incorporation or code of regulations) certain mandatory responsibilities to pay directors’ litigation expenses. 

Ohio Revised Code §1701.13(E)(5)(a) states that Ohio corporations "shall" pay the expenses (when they are incurred) of directors who are subject to "actions, suits, or proceedings" asserted against a director because he is a director. The only step a director must take to receive such advances is to execute an "undertaking," which must state that the director will: (i) reasonably cooperate with the corporation concerning the action, suit or proceeding, and (ii) repay all expense to the corporation if it is proven in court by clear and convincing evidence that the director’s action or failure to act was taken deliberately to harm the corporation or with reckless disregard for the best interest of the corporation.  This statute applies to directors only (not corporate officers, employees, agents, other representatives, etc.). 

In Miller v. Miller, the Ohio Supreme Court ruled that a corporation’s obligation to pay litigation expenses to a director (after receiving the director’s "undertaking") is mandatory- there is no requirement for an underlying indemnification agreement. The Court further stated that a corporation cannot avoid this duty to advance expenses by claiming that the director’s alleged misconduct, if proven, would be a violation of the director’s fiduciary duties.  Finally, the court noted that a corporation can avoid this mandatory duty to pay litigation expenses – but only if the corporation’s articles of incorporation or code of regulations specifically state that Ohio Revised Code §1701.13(E)(5)(a) does not apply.