Structuring Indemnification Escrows for Executive Protection
Structure executive indemnification escrows as bankruptcy-remote grantor trusts with non-discretionary five-day advancement mandates to insulate defense funds.
Legal Defense Advancement
Meaning
Financial mechanisms in corporate agreements provide for the immediate payment of a director’s legal fees before a trial concludes. Legal defense advancement ensures that an individual can afford a high quality defense without waiting years for a final verdict. The company pays the invoices as they arrive.
This is a separate right from the final indemnification which covers the ultimate loss.
Liquidity Support
Litigation against officers is often incredibly expensive and lasts for several years. Because legal defense advancement is available, the director does not have to sell personal assets to pay their lawyers. This support is provided as a loan that is repayable under specific conditions.
It allows the officer to focus on the case rather than the cost.
Clawback Provision
Recipients must sign an undertaking to return the money if they are eventually found to have committed a crime. Under legal defense advancement, the obligation to repay is triggered by a final judicial determination of bad faith. If the court finds the person was not entitled to be protected, the company must seek the funds back.
This protects the shareholders from subsidizing illegal acts.
Litigation Funding
Provisions for these payments are usually found in the company bylaws or a private contract. The legal defense advancement clause must be drafted clearly to prevent the company from stopping payments during a dispute. It is often the most valuable part of a director’s compensation package.
This funding starts from the moment a claim is made.