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Indemnifying Errant Employees

 

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Today’s New York Times carries a very interesting column by Steven M. Davidoff, a professor at the University of Connecticut School of Law, on the contrast between how publicly-held and privately-held companies treat requests for indemnification from errant executives.

Indemnification requires an employer to pay any damages awarded against an executive (and usually cover his legal fees as well) who has been found to have engaged in wrongdoing.  Prof. Davidoff points out that public companies almost always offer very broad indemnification rights to their executives, while private companies are much more reluctant to do so.  His thesis is that executives of public companies do not directly bear the cost of indemnifying their errant brethren- the shareholders do – so it is easy for them to use company funds to pay legal judgments.   Moreover, these executives do not want to deny indemnification to a predecessor when they themselves may need such consideration in the future.  By contrast, privately-held companies have no shareholders to bear the cost; therefore, its executives, who are also its owners,  will deny such requests in order to protect their own bottom line.   The result:  wrong-doers in public companies walk away whole, while those in private firms end up paying out of their own pocket.

What Prof. Davidoff does not mention is that in many states, including Minnesota, employers are required to indemnify their employees for employment-related damages, penalties or fines unless there is proof that the employee was guilty of “intentional misconduct, willful neglect of the duties of the employee’s position, or bad faith”.   Some Minnesota corporations have an even broader obligation, including having to advance legal fees to the employee while the matter is still pending. 

Prof. Davidoff is correct in urging companies to limit their willingness to absolve executive wrongdoers, but companies must also consider whether state law permits them to do so.

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