Indemnification, Exculpation and Insurance

The Corporation has a right to indemnify its directors for expenses incurred by the reason of serving on the board. This provision will be enforceable only if included in the Certificate of Incorporation.

 

It is not absolute, however. The law allows eliminating directors’ personal liability except the matter when violation of duty of loyalty or good faith is claimed. The following powers can be included:

 

(a) To indemnify any director, officer, etc. made a party to a third-party suit by reason of acting in such capacity against all legal expenses, including judgments and attorneys fees, if they acted in good faith and in a manner reasonably believed to be in company’s best interests.

(b) The same applies to the derivative suits except only certain expenses (no judgments) and subject to judicial approval if found liable.

(c) If successful on the merits, any officer, director, etc… must be reimbursed for expenses.

(e) The company may advance expenses, but officer/director must promise to repay it if it turns out he or she was not entitled to reimbursement.

(f) Indemnification described in DGCL §145 is not exclusive of any other rights to indemnification

(g) The company may buy an insurance to cover the expenses.

 

We have the following scenarios under DGCL §145

 

If a director is sued by the company:

 

·         Wins - Must be reimbursed for all expenses

·         Losses - May be reimbursed for some expenses (not penalty or damages) if court approves

·         Settles - May be reimbursed for some expenses if court approves

 

If a director is sued by anybody else:

 

·         Wins - Must be reimbursed for all expenses

·         Losses - May be reimbursed for all expenses if company determines good faith

·         Settles - May be reimbursed for all expenses if company determines good faith

 

Litigation is a long and costly process. Even hypothetical threat of being sued may turn off many individuals who would make great directors otherwise. By including indemnification provision in its chapters the company has better chances to convince qualified individuals to serve on its board. It is also may be only fair to reimburse the person if he acted in good faith, believing that his/her decisions and actions were in the best interests of the company, and to the best of his ability.

 

Considering the costs of the legal processes in the United States the companies may want to buy insurance covering this particular matter.  Insurance cost money as well and premiums accumulate, but in case an indemnification is triggered

 

·         The company avoids catastrophic cost

·         Directors and managers may be legitimately concerned about the company’s creditworthiness

·         Good faith limitations prescribed by §145(a) and (b)

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