Client Alert

Delaware Court of Chancery Holds that a Board of Directors Can Eliminate Unvested Right to Advancement without Director Consent

August 11, 2008

Carl Sanchez and Deyan Spiridonov

In a recent decision, the Delaware Court of Chancery clarified that, under Delaware law, a directors right to advancement of expenses does not vest until a claim is asserted against the director. Until the right to advancement vests, the board can amend the bylaws to deny advancement to former directors. Schoon v. Troy Corp., 948 A.2d 1157 (Del. Ch. 2008).

This decision is contrary to the common assumption that the right to advancement vests when a director takes office. It also has important implications for corporate policies concerning director advancement and indemnification. These policies affect a companys ability to recruit well-qualified directors and to defend against claims that potentially lack merit. Because of the impact of this decision, boards should reevaluate the corporations bylaws to ensure that they are appropriate for the companys needs.

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