Many states, including Delaware, have passed statutory protections which provide directors and officers with advancement and indemnifications rights. When a director or officer is sued, the corporation advances defense expenses (and generally seeks reimbursement for that advancement under Side-B of its directors and officers insurance policy). But the statutory protections for advancement and indemnity are not applicable to all individuals affiliated with the company – they generally apply only to directors and officers.
With "title creep" and "title inflation" prevalent in the financial services industry, that issue has become murkier over time. Is a vice-president an officer of the Company by virtue of his title? That question took center stage in a recent decision by the Third Circuit – Aleynikov v. Goldman Sachs Group – where a Goldman Sachs computer programmer sought advancement of defense expenses arising out of criminal allegations that he copied source code developed at Goldman Sachs and transferred them to an outside server.
The question of whether a vice-president qualifies as an "officer" had dramatic implications for the corporation. If the vice-president was considered an "officer" of the company, he would be entitled to advancement of over $2 million in defense expenses. However, if the vice-president was not considered an officer, he would be forced to bear those expenses on his own.
The Third Circuit began its analysis by examining the company's bylaws, concluding that these bylaws were ambiguous as to whetherthe vice-president qualified as an "officer." Had the bylaws been clear, resolving the issue would have been a much more simple matter for the Court. But given the ambiguity, the Third Circuit was faced with the more difficult question of determining how to resolve the meaning of "officer" within the corporation's bylaws.
A contra "contra proferentum" ruling
The Aleynikov court explained that under Delaware law, "when one side of a contract was unilaterally responsible for the drafting, courts apply contra proferentum and construe ambiguous terms against the drafter." Since it was undisputed that the company unilaterally drafted the bylaws, the ambiguity as to whether the vice-president was an "officer" should therefore be construed against the company, right?
Apparently not. The Aleynikov court, over a dissent on the issue, found that the doctrine inapplicable. While contra proferentum might be applicable to resolve any ambiguities regarding the scope of the right to indemnification and advancement between directors and officers, the Third Circuit ruled that the doctrine had no application in determining whether the vice-president was an officer in the first instance. In other words, the Third Circuit ruled that contra proferentum was applicable to determine the scope of the rights under a contract, but not applicable in determining who was entitled to those rights. Without this interpretive tool, the Aleynikov Court remanded the case to the district court to consider extrinsic evidence regarding the meaning of the term "officer" in the company's bylaws – specifically, "course of dealing" evidence and "trade usage" evidence.
If the bylaws are ambiguous, what about the D&O?
Most financial institutions purchase Side-B coverage under D&O policies to pay these advancement and indemnity costs. Many D&O policies provide coverage not only FOR corporate reimbursement of directors and officers, but also FOR corporate reimbursement of employees. However, some restrict coverage only to the company's duly elected or appointed directors and officers. It remains to be seen whether the D&O insurance companies who sell these narrower coverages will rely on Alyenikov as a grounds to deny coverage for corporate reimbursement of individuals who fall in a gray area with respect to officer status. If insurance companies do push back on coverage for advancement and indemnity on the grounds that a reimbursed vice-president is not an "officer," policyholders should be prepared to draw a distinction between the Aleynikov case (which eschews the use of contra proferentum) and hornbook insurance law (which mandates that ambiguities be resolved in favor of the policyholder).
Furthermore, financial institutions with prevalent usage of the term "vice-president" within their corporate structure should consider (1) reviewing their bylaws to ensure that their definition of officer is clear and unambiguous, (2) ensuring that the scope of the term "officer" meets the company's goals as it relates to advancement, indemnity, and insurance, and (3) purchasing D&O policies that provide reimbursement for intended individuals who meet the company's advancement and indemnity goals.
About the Author:
Michael Stoner (mstoner@andersonkill.com) is an attorney in Ventura, California office, of Anderson Kill, a national law firm. Mr. Stoner's practice focuses on insurance recovery, corporate and commercial litigation, and environmental law. He is a member of the firm's Financial Services insurance coverage group and regularly contributes to the group's Financial Insurance Law blog.
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