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Corporate misdeeds and their impact upon enforceability of executive employment agreement indemnification provisions.

Article Excerpt
An infectious greed" has caused the recent breakdown of "corporate governance checks and balances," according to Federal Reserve Chairman Alan Greenspan. (1) This greed, Greenspan suggests, stems in part from employment agreement provisions that have "perversely created incentives to artificially inflate reported earnings in order to keep stock prices high and rising." (2)

Although Greenspan was specifically referring to stock option provisions, another common controversial feature of many executive employment agreements is the "indemnification" provision. (3) Indemnification is the practice by which corporations pay expenses of officers or directors who are named as defendants in litigation relating to corporate affairs. (4) For example, L. Dennis Kozlowski's executive employment agreement with Tyco International Ltd. contained a standard indemnification provision, providing:

To the fullest extent permitted by law, the Company shall indemnify Executive (including the advancement of expenses) for any judgments, fines, amounts paid in settlement and reasonable expenses, including attorneys' fees, incurred by Executive in connection with the defense of any lawsuit or other claim to which he is made a party by reason of being an officer, director employee or consultant of the Company or any of its subsidiaries or affiliates. (5)

Dick Cheney's employment contract with Halliburton Company contained a similarly broad indemnification agreement, in which the company agreed to indemnify Cheney to the fullest extent permitted by applicable law in effect on the date of the execution of the agreement "and to such greater extent as applicable law may thereafter from time to time permit." (6) The company further agreed to contribute to expenses, judgments, penalties, fines, and settlement amounts "[i]n the event that the indemnity contained in ... this Agreement is unavailable or insufficient to hold Indemnitee harmless...." (7)

In light of the recent and much-publicized failings of corporate boards and top executives of the country's largest companies, it is unclear to what extent Florida courts will enforce indemnification provisions. Particularly uncertain is whether courts will uphold employment agreement clauses that purport to indemnify executives for punitive damages based on the executive's own wrongdoing. Florida statutes are ambiguous on this point and Florida courts have yet to address the issue. However, as politicians and courts further react to the decline in public trust of traditional modes of corporate governance, heightened scrutiny of these still-common provisions is foreseeable.

Common Law Fiduciary Duties

Corporate executives have historically been bound by certain fiduciary duties. (8) According to Fletcher Cyclopedia of the Law of Private Corporations, "a director ... must be loyal to his trust, use ordinary and reasonable care, must not exceed the powers of the corporation nor his powers as an officer, and must otherwise act in good faith, and is liable for fraud or misappropriation or conversion of corporate assets, and generally is liable for negligence...." (9) For instance, the landmark decision Smith v. Van Gorkum, 488 A.2d 858 (Del. 1985), emphasized...