Updated to discuss the holding in Blankenship v. Alpha Appalachia Holdings, Inc. and related Delaware case law.
Undertaking to Repay Advancement of Expenses
This is a form of undertaking by an indemnified party to repay expenses advanced by the indemnifying party. It is commonly required under an indemnification agreement between a company and its directors and officers, in which the company agrees to advance funds to the indemnified director or officer for expenses incurred by the director or officer as a result of certain legal proceedings, claims or investigations. In the undertaking, the indemnified party agrees to repay the funds to the company under certain conditions. This Standard Document has integrated notes with important explanations and drafting tips.
As part of their provisions governing indemnification, state corporate laws typically provide for advancement of expenses. For example, Section 145(e) of the Delaware General Corporation Law ( www.practicallaw.com/8-382-3393) (DGCL) allows a company to pay the expenses of an officer or director in defending against a proceeding in advance of the final disposition of that proceeding as long as the director or officer delivers an undertaking to repay those amounts if it is ultimately determined that the director or officer is not entitled to be indemnified.
Advancement of expenses provides immediate relief from the burden of paying the significant on-going expenses associated with investigations and proceedings as they occur. Advancement of expenses occurs before any final determination of a proceeding and it is a credit towards future indemnification. If it is later determined that indemnification is not available or is prohibited, advanced expenses should be repaid to the company.
Indemnification agreements between a Delaware company and its directors and officers often require the company to advance expenses to the indemnified party if the party provides the type of undertaking required under Section 145(e). The statute is silent on any other provisions or the form of the undertaking required from the indemnified party.
This Standard Document is a form of undertaking by an indemnified party to repay any advancement of expenses paid by a Delaware corporation under certain circumstances. It generally focuses on the requirements of a Delaware corporation because many companies are incorporated there. If the company advancing expenses is incorporated outside of Delaware, counsel planning to use this Standard Document must first review the applicable corporate statutes of the company's state of incorporation.
This Standard Document assumes that the Delaware corporation and the indemnified party have already entered into a formal indemnification agreement. This undertaking is drafted to be used with Standard Document, Indemnification Agreement (DE Public Company) ( www.practicallaw.com/6-519-6334) and it can be attached as an exhibit to the indemnification agreement as a form of undertaking. This Standard Document can also be modified for use as a form of undertaking in either of the following situations:
An indemnification agreement is silent on the form of required undertaking.
There is no indemnification agreement, but the company provides for the advancement of expenses in its organizational documents.
This undertaking (including the defined terms used in it) should be tailored to conform to the related indemnification agreement or the company's charter documents, as applicable.
[FORM OF] UNDERTAKING TO REPAY ADVANCEMENT OF EXPENSES
[OFFICER(S) TO WHOM NOTICE IS DELIVERED]
[CITY], [STATE] [ZIP CODE]
Re: Undertaking to Repay Advancement of Expenses.
If this undertaking is being made according to an indemnification agreement, it should be addressed to the company officer(s) identified in the notices provision of the agreement.
If there is no agreement and the company's organizational documents do not identify to whom the undertaking (or any request for the advancement of expenses) should be delivered, the indemnified director or officer may instead address it generally to the company, but deliver copies of the undertaking to several officers, including the chief executive officer, corporate secretary and general counsel, as well as the company's board of directors.
The director or officer providing this undertaking should comply with the notice and delivery requirements in the indemnification agreement, unless the advancement of expense section of the agreement specifies a different form of notice or method of delivery.
[Ladies and Gentlemen/Dear [ADDRESSEE]]:
This undertaking is being provided pursuant to that certain Indemnification Agreement, dated [DATE], by and between [COMPANY], a Delaware corporation (the "Company"), and the undersigned as Indemnitee (the "Indemnification Agreement"). Terms used herein and not otherwise defined shall have the meanings ascribed to them in the Indemnification Agreement. Pursuant to the Indemnification Agreement, among other things, I am entitled to the advancement of Expenses paid or incurred in connection with Claims relating to Indemnifiable Events.
If there is no indemnification agreement, this paragraph should be replaced with the following:
This undertaking is being provided in connection with Section [NUMBER] of the [By-laws/[Certificate/Articles] of Incorporation] of [COMPANY], a Delaware corporation (the "Company"), which provides indemnification to its directors and officers to the fullest extent authorized by[ Delaware General Corporation Law (the "DGCL")/[STATE CORPORATE STATUTE]] and Section [145/[NUMBER]] of the [DGCL/[STATE CORPORATE STATUTE]], pursuant to which I am entitled to the advancement of expenses paid or incurred in connection with certain proceedings.
This language should be modified for the appropriate defined terms used in the company's charter documents.
I have become subject to [DESCRIPTION OF PROCEEDING] (the Proceeding) based on [my status as [an officer/[TITLE OF OFFICER]/a director] of the Company/alleged actions or failures to act in my capacity as [an officer/[TITLE OF OFFICER]/a director] of the Company. [This undertaking also constitutes notice to the Company of the Proceeding [pursuant to Section [7/[NUMBER]] of the Indemnification Agreement].] The following is a brief description of the [current status of the] Proceeding:
[DESCRIPTION OF PROCEEDING]
Indemnification agreements often include a provision requiring the indemnified party to notify the company of any claim against the party for which indemnification or advancement of expenses may be sought (see Standard Document, Indemnification Agreement (DE Public Company): Section 7. Notification and Defense of Claims ( www.practicallaw.com/6-519-6334) ). If the indemnified party making this undertaking has already notified the company of the claim to which the expense advance relates, the second sentence in brackets should be deleted. It can be replaced with the following:
Notice of this Proceeding was previously delivered to the Company [in accordance with Sections [NUMBER] and [NUMBER] of the Indemnification Agreement] on [DATE].
The two bracketed numbers above refer to the provisions in the indemnification agreement regarding Notification of Claims and Notices (see Standard Document, Indemnification Agreement (DE Public Company): Section 20. Notices ( www.practicallaw.com/6-519-6334) ).
If there is no indemnification agreement, the bracketed reference to the provisions of the indemnification agreement should be deleted. This language can be modified to reflect the applicable provision in the company's charter documents, if there is one.
[Pursuant to Section [4/[NUMBER]] of the Indemnification Agreement, the Company can (a) pay such Expenses on my behalf, (b) advance funds in an amount sufficient to pay such Expenses, or (c) reimburse me for such Expenses. Pursuant to Section [4/[NUMBER]] of the Indemnification Agreement, I hereby request an Expense Advance in connection with the Proceeding. The Expenses for which advances are requested are as follows:]
[DESCRIPTION OF EXPENSES]
If the indemnified party has already made a formal request for advancement of expenses, this paragraph can be deleted.
This paragraph assumes the indemnified party is asking for the company to advance funds. If the party is instead going to request reimbursement or that the company pay the expenses directly, this paragraph must be modified to reflect the specific request.
If there is no indemnification agreement, this paragraph should be modified to reflect the appropriate provisions of the company's charter documents and/or state corporate law, as applicable.
[In connection with the request for Expense Advances [set out above/delivered to the Company separately on [DATE]],] I hereby undertake to repay any amounts paid, advanced or reimbursed by the Company for such Expense Advances to the extent that it is ultimately determined that I am not entitled to indemnification [under the Indemnification Agreement].
This language should be modified as necessary to reflect the undertaking language specified in the advancement of expenses provision in the indemnification agreement (see Standard Document, Indemnification Agreement (DE Public Company): Section 4. Advancement of Expenses ( www.practicallaw.com/6-519-6334) ).
For example, this document conforms to the last sentence of Section 4, which provides that the indemnitee must execute and deliver an undertaking in connection with a request for the advancement of expenses. If the undertaking is being delivered at an earlier stage (such as before an advance is actually requested), the bracketed clause at the beginning of the sentence can be deleted.
In addition, the language of this undertaking paragraph is based on the specific language of Section 4, which states only that the indemnitee must undertake to repay any expenses and does not impose any other terms or conditions. Typically an undertaking does not require the indemnified party to do any of the following:
Post any form of collateral or security.
Offer proof of the party's ability to repay the advances.
Pay interest on the advances.
Make any representations regarding the party's good faith or the lawfulness of the party's actions.
The company can negotiate for any of these conditions with the director or officer as long as these conditions, or the right to include any conditions, are specifically included in the advancement provision of an indemnification agreement (or other agreement that includes indemnification rights) or specifically permitted in the company's charter documents. For example, in Thompson v. The Williams Companies, Inc., No. 2716-VCS, 2007 WL 3326007 (Del. Ch. July 31, 2007), the company's advancement bylaw stated that advancement expenses would "be paid upon such terms and conditions, if any as the Board of Directors deems appropriate." The Thompson court ultimately upheld a form of undertaking that conditioned advancement expenses on the officer's representing that he believed that he had acted lawfully and in the best interests of the company and posting a security bond.
The company cannot decide to impose any conditions after an agreement has been executed that did not provide for any conditions to the undertaking or if the charter documents do not expressly authorize the company to do so (see Blankenship v. Alpha Appalachia Holdings, Inc., et al, C.A. No. 10610-CB, 2015 WL 3408255 (Del. Ch. May 28, 2015) (concluding that the Massey Energy Company charter and merger agreement with Alpha Natural Resources, Inc. did not expressly authorize the companies to demand any terms or conditions on advancement other than an undertaking to repay, and that the companies do not have the right to request anything more from the officer seeking advancement other than an undertaking to repay those expenses) and In re Cent. Banking Sys., Inc., 1993 WL 183692 (Del. Ch. May 11, 1993) (concluding, where the only condition imposed by a mandatory advancement bylaw was the delivery of an undertaking to repay, that the company lacked the authority to require that the recipient of advanced expenses provide appropriate security or show financial responsibility as a condition to receive advances)).
Potential directors and officers are typically extremely reluctant to agree to any of these conditions. In particular, requiring security or a demonstration of the ability to repay advances would discourage people from accepting positions as directors or officers. The company should weigh the benefit of retaining a specific individual as director or officer against the risk that this individual may be brought into a lawsuit, request advancement of expenses, ultimately not be entitled to indemnification and refuse (or be unable) to repay the advances.
If there is no indemnification agreement, this paragraph should be modified to reflect the appropriate provisions of the company's charter documents (or state corporate law, as applicable).
This undertaking shall be governed by and construed in accordance with the laws of the State of [Delaware/[STATE]], without regard to the principles of conflicts of laws thereof.
Very truly yours,
[cc: [ADD PARTY NAME AND ADDRESS AS REQUIRED]]
If the indemnification agreement requires that any person in addition to the company receive notices, that party can be added here. If there is no other person or party who should be informed of a request for advancement of expenses, this can be deleted.