Under the heading of “Executive Compensation,” this blog considers all matters relevant to executives, executives’ employment, and their employment agreements, including strategies to protect the executives’ earned compensation. A change in Delaware law that becomes effective January 1, 2021, suggests that companies, directors, and covered executives may want to revise the wording of the company’s indemnification agreements, articles or certificate of incorporation, and by-laws. The change is explained in detail in this excellent article by John Mark Zeberkiewicz of Richards, Layton & Finger, P.A., but I will try to summarize it below.
DGCL Section 145(c), currently requires a corporation to indemnify each present or former director or officer against any expenses such person actually and reasonably incurs (including attorneys’ fees) in defense of or in connection with any action, suit, or proceeding for which the corporation may indemnify them under Sections 145(a) or (b), to the extent that he or she has been successful on the merits or otherwise. This requirement applies regardless of whether indemnification rights have been granted under the certificate of incorporation or bylaws, any agreement, or through other means and without any need for a determination as to whether the officer or director has met the standard of conduct.
Section 145(c) does not define the “officers” to whom a corporation must provide such mandatory rights to indemnification. Amendments made in 2020 revised Section 145(c) to add a new clause (1), which adds a new sentence providing that, for indemnification with respect to any act or omission occurring after December 31, 2020, references to “officer” for purposes of Section 145(c), shall mean only a person who at the time of such act or omission is deemed to have consented to service by the delivery of process to the registered agent of the corporation pursuant to Section 3114(b) of title 10 of the Delaware Code.
The definition of “officers” under Section 3114(b) is limited to (1) the corporation’s president, chief executive officer, chief operating officer, chief financial officer, chief legal officer, controller, treasurer or chief accounting officer, (2) an individual identified in public filings as one of the most highly compensated officers of the corporation or (3) an individual who, by written agreement with the corporation, has consented to be identified as an officer for purposes of Section 3114(b).
Many companies will want to provide the mandatory indemnification protection of Section 145(c) and the lower the standard of conduct to more individuals than are included in the smaller group “officers” under Section 3114(b). In light of this change, corporations should review the provisions of their individual agreements, certificates of incorporation, and bylaws dealing with indemnification and advancement to ensure that they meet the corporation’s objectives.
I am VP and Liaison between the Executive Compensation and D&O Insurance and Indemnification Committees of the ABA Business Law Section. Although lacking in compensation and perks, this role, has led to our offering a virtual presentation for the Chicago Chapter of NASPP Compensation Clawbacks, D&O Insurance, and Indemnification, on December 2. You can sign up here.