Drafting Contractual Indemnities to Protect Second Line Decision Rights Mechanics
Contractual indemnities for second line decision rights enforce mandatory fee advancement, narrow misconduct carveouts, and dedicated escrow funding.
Undertaking Agreement
Meaning
A formal promise provided by an individual to repay the costs of a legal defense if that person is eventually found ineligible for indemnification. The undertaking agreement acts as a form of security for the corporation. It allows the firm to advance legal fees while maintaining a path to recover those funds if the recipient is found to have committed misconduct.
Repayment Guarantee
Contractual validity remains even after the conclusion of the underlying litigation. An undertaking agreement is typically a prerequisite for receiving any legal expense advancement from the company treasury.
Financial Risk
Assessment of the individual’s ability to repay is rarely performed at the time of signing. Within the undertaking agreement, the promise is often unsecured, meaning the company takes on the risk of the person’s future insolvency. This mechanism is common in large scale industrial litigation where legal costs are fronted by the employer.
If the legal bills exceed the individual’s personal net worth, the corporation faces a total loss on the advanced funds.
Procedural Trigger
Boards of directors review these documents to fulfill their fiduciary duty to the shareholders. It demonstrates that the company is not gifting corporate assets to potentially liable parties.