All states have statutes, typically found in the state’s corporation laws, permitting or requiring indemnification of officers and directors in certain situations. For example, Minnesota’s statutory indemnification provisions can be found at Minn. Stat. § 302A.521, and Delaware’s can be found at § 145 of the Delaware General Corporation Law.
State indemnification statutes can vary widely, but most address certain items such as:
- whether indemnification is permissive or mandatory (or what types of indemnification are permissive and which mandatory);
- persons to whom indemnification obligations are owed;
- what standard of conduct must be met by a potentially protected person to trigger indemnification;
- what type of losses are subject to indemnification; and
- procedures for obtaining advances or later payment of indemnified amounts.
Corporate organizational documents normally provide for indemnification in accordance with the statute of the state of organization, though it may also provide for narrower or broader indemnification (assuming permitted by the statute, and it usually is). Broader indemnification obligations are common, as they are a way to help companies attract and retain qualified officers and directors.
Indemnification obligations can have significant ramifications. For example, the Delaware Supreme Court recently upheld an over $1.8 million award to a corporation’s former CFO, Mr. Horne, in a lawsuit brought by the former CFO against the corporation to obtain indemnification. OptimisCorp v. Horne, No. 223, 2017 (Del. Dec. 15, 2017). Mr. Horne had been accused in 2013 by the company’s CEO of breaching his duties to the company for allegedly bribing a female employee to accuse the CEO of sexual harassment during a period in which different parties were fighting for control of the company.
After a trial, Mr. Horne was cleared of all claims. He then filed the indemnification suit against the company for the fees he incurred in successfully defending against the claims. The court agreed that the company’s indemnification obligations were triggered and awarded Mr. Horne $1.8 million for fees he incurred in the 2013 lawsuit, as well as the additional costs he had sustained in pursing the indemnification claim. For a copy of that opinion, click here. In a one-page opinion, after an appeal by the company, the Delaware Supreme Court affirmed.
Most corporations protect against indemnification exposure through director and officer insurance. An important practical tip is for corporations to regularly reevaluate their indemnification obligations and D&O insurance coverage, as changing circumstances may warrant a revision to one or both.