A director is defined as not only a director of the corporation but also an officer, partner, trustee, employee or agent of another foreign or domestic corporation, partnership, joint venture, trust, employee benefit plan or other entity.
The director must repay the advancement if they are not entitled to mandatory indemnification and either a court or the Board of Directors, special legal counsel, or shareholder vote determines that the director did not meet the standard of conduct.
A few additional rules are required for advancement to officers. If the individual is an officer but not a director the advancement may be made to “… the further extent as may be provided by the Articles of Incorporation, the Bylaws, a resolution to the Board of Directors or contract. …” If the company will not advance the expenses, directors and officers may apply to a court for an advance of expenses to the same extent to which a director is entitled to an advance. The court conducting the proceeding or any other court with jurisdiction may order the advance of expenses if the director is entitled to mandatory indemnification or the director is “fairly and reasonably” entitled to the advance.
Under the LLC statutes, an LLC has the power to “indemnify a member, manager, employee, officer, or agent or any other person. “The LLC statutes are structured to allow the Operating Agreement to provide the terms and conditions of indemnification, including advancement. However, a court would likely allow advancement in an LLC context in light of the Arizona corporate statutes.
Persons bringing intra-corporate claims who are owners of the entity must realize prior to bringing suit that should they name management or employees in such a suit, it is likely that such defendants will seek and obtain an advancement from the company to pay defense costs. Thus, in effect, the plaintiffs, by virtue of their ownership in the entity, are paying a portion of their assets and interest in the company to cover the advanced attorney fees of their opponents. Within any intra-corporate dispute or business divorce context, the balance of the issues may be shifted purely by the fact the company’s accounts are being drained to pay the defendants’ attorneys’ fees. While some may claim foul, the advancement statutes are an important protection for management brought into any kind of proceeding; giving them assurance that their personal funds are not at risk while defending themselves for acts allegedly taken while they were acting in their official capacity for the company.