The Delaware legislature has enacted a number of amendments to the Delaware General Corporation Law (“DGCL”) relating to the governance of Delaware corporations. These new amendments address current corporate governance issues concerning:

  • proxy access and expense reimbursement;
  • director indemnification and advancement of expenses;
  • judicial removal of directors; and
  • flexibility in setting record dates by providing that the record date for mailing the notice of meeting need not be the same as the record date for determining stockholders entitled to vote.

The effective date of the amendments is August 1, 2009.

Of primary importance to the readers of this blog should be the amendment to Section 145(f) of the DGCL and its impact on director indemnification.

Director Indemnification and Advancement of Expenses

The Delaware legislature amended Section 145(f) of the DGCL in response to concerns raised by practitioners and directors following the highly publicized decision in Schoon v. Troy Corp., 948 A.2d 1157 (Del. Ch. 2008). As you may remember from our earlier Acredula article on the Schoon decision, the court held that, under the indemnification bylaw in question, a former director’s expense advancement rights did not vest until the director was named as a defendant in a suit in which an indemnifiable claim was asserted. In doing so, the Schoon court upheld a bylaw amendment that eliminated a former director’s right to advancement of expenses, despite the fact that the director served under the company’s previous bylaws and left the company’s board prior to the bylaw amendment that eliminated the right of advancement. The bylaw in question did not provide that the director was serving in reliance on the bylaw, that the right to indemnification was a contract right or language that stated any repeal, modification, or amendment to the indemnification or advancement provisions will not adversely affect any right in respect to acts or omissions of any indemnified person occurring prior to such repeal, modification, or amendment.”

With the amendment, the Delaware legislature makes clear that a director’s right to indemnification or advancement of expenses under a company’s bylaws or certificate of incorporation vests at the time of the act or omission that is the subject of the indemnification or advancement of expenses. Further, the amendment provides that such rights may not be eliminated or impaired by amendments to the bylaws or certificate of incorporation after the occurrence of the act or omission for which indemnification or advancement of expenses is sought, unless the provision in effect at the time of the act or omission authorizes the elimination or limitation of indemnification or advancement rights.

While best practices still suggests director and corporations should enter into written indemnification agreements this action by the Delaware legislature does alleviate the concerns raised by the Schoon decision.

Judicial Removal of Directors

The Delaware legislature also amended Section 225, which governs contested election of Directors, to add a new subsection (c), which authorizes the Court of Chancery to remove a director, upon application by the corporation or derivatively in the right of the corporation by any stockholder or member of a nonstock corporation, who has been convicted of a felony or found by a court to have committed a breach of the duty of loyalty in connection with his or her duties to the corporation as a Director. The new section requires a corporation or its stockholders to overcome a substantial evidentiary burden of proving that the director did not act in good faith in performing the acts underlying the conviction or judgment and that the removal of the director is necessary to avoid irreparable harm to the corporation.