Student Scholarship. A Critique of the Ohio Supreme Court Decision Interpreting Ohio’s Corporate Advancement Statute in Miller v. Miller.

As previously posted, on July 3, 2012, the Supreme Court of Ohio issued a merit decision in Miller v. Miller, 2012-Ohio-2928. At issue in this case was the interpretation of Ohio’s corporate advancement statute, R.C. 1701. 13 (E)(5). In a 6-1 decision authored by Chief Justice Maureen O’Connor, the Supreme Court held that a corporation’s director was entitled to the advancement of his litigation expenses in a shareholder derivative suit.

This is the case syllabus:

1. A corporation cannot avoid its duty to advance expenses to a director under R.C. 1701.13(E)(5)(a) by claiming that the director’s alleged misconduct, if proven, would amount to a violation of his or her fiduciary duties and would therefore foreclose indemnification.

2. When a corporation has received from a director the undertaking described in R.C. 1701.13(E)(5)(a), the corporation is required to advance expenses to the director unless the corporation’s articles or regulations specifically state that R.C. 1701.13(E) does not apply to the corporation.

Last year Caitlin Graham Felvus, a 2014 graduate of the University of Cincinnati College of Law, wrote an article for the University of Cincinnati Law Review on the Miller decision entitled “Advancement of Legal Fees May be More Than Corporations Bargained For: Miller v. Miller, 973 N.E.2D 228 (Ohio 2012).” Caitlin is now working at Taft Stettinius & Hollister LLP and awaiting her July 2014 bar results.

The article analyzed the history of legal decisions in the United States that led the General Assembly to amend its corporate statutes to provide for the advancement of legal fees for corporate directors and compared the legislation to similar statutes in Delaware. Graham explains that the statutes were amended in an effort to help corporations entice qualified individuals to take positions as corporate directors at a time when “one in five directors was involved in litigation.”

Next, the article examined the Miller case in detail, outlining the parties, the procedural history, and the Ohio Supreme Court’s decision. Graham suggests that the case produced unintended consequences for closely-held corporations like the one in Miller, forcing them to advance a corporate director’s legal fees when the director is a party-opponent. Further, she argues that the Supreme Court inappropriately distilled the case down to a corporation suing its director for a violation of its fiduciary duty, saying that this was oversimplifying the facts of the claim and prevented the court from thoroughly analyzing the issue.

The result of Miller, according to Graham, is contrary to the original intention of the advancement statute, which was to benefit corporations. Miller puts closely-held corporations in a particularly bad place, allowing corporate funds to be “pilfered to fund family feuds and board arguments without any regard to fiduciary obligations or safeguards for the corporate interest” unless they choose to opt out of advancement, an option that could be equally harmful to the corporation.

Finally, Graham calls for the General Assembly to reexamine the corporate advancement statute in light of the issues in Miller to determine how to accomplish the statute’s original goal of attracting and retaining corporations, recommending that the statute include specific situations for when advancement should apply.

Access Graham’s complete article here.

Student Contributor: Michael Elliott

 

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