In yesterday’s post, I considered the fundamental question of why indemnification provisions are included in articles of incorporation.  State general corporation laws typically contain express provisions empowering or authorizing corporations to indemnify other persons, including directors, officers and agents.  For example, California has its Section 317, Delaware has Section 145 and Nevada has NRS 78.7502.  When an indemnity provision is included in the articles (or certificate) of incorporation, how should a court interpret those provisions?

Many practitioners may be surprised to learn that Section 2778 of the California Civil Code establishes specific rules for the interpretation of contracts of indemnity.  This, of course, begs the question of whether the articles of incorporation constitute a contract.  The Delaware Supreme Court has held that a certificate of incorporation constitutes at least three separate contracts: (1) a contract between the state and the corporation; (2) a contract between the corporation and its stockholders; and (3) a contract among the stockholders.  STAAR Surgical Supply Co. v. Waggoner, 588 A.2d 1130, 1136 (Del. 1991).  The court didn’t say whether the certificate also constitutes a contract with the directors, officers and other persons indemnified.

If the articles do constitute a contract with the directors, officers or other persons being indemnified, what law should be applied to that contract?  Under Section 291 of the Restatement (Second) of the Conflicts of Laws, the rights and duties of a principal and agent are determined by the local law which, with respect to the particular issue, has the most significant relationship to the parties and the transaction.  When a person is hired to perform services in California by a corporation located in California, might a court conclude that California has the most significant relationship to the parties and the transaction?  One might argue that the Internal Affairs Doctrine overrides this conclusion.  Yet, the Internal Affairs Doctrine would not seem to be an obstacle to including a choice of law provision in an employment agreement with an officer and that employment agreement could include an indemnity clause. 

Recently, some Delaware corporations have included exclusive forum provisions in their certificates of incorporation.  Below is one example:

The Court of Chancery of the State of Delaware shall be the sole and exclusive forum for (i) any derivative action or proceeding brought on behalf of the Corporation; (ii) any action asserting a claim of breach of a fiduciary duty owed by any director, officer or other employee of the Corporation to the Corporation or the Corporation’s stockholders; (iii) any action asserting a claim against the Corporation arising pursuant to any provision of the General Corporation Law, the Restated Certificate or the Bylaws of the Corporation; or (iv) any action asserting a claim against the Corporation governed by the internal affairs doctrine.  Any person or entity purchasing or otherwise acquiring any interest in shares of capital stock of the Corporation shall be deemed to have notice of and to have consented to the provisions of this Article VI.

While Clause (iii) arguably makes Delaware’s Court of Chancery the exclusive forum for actions for indemnity and advancement (to the extent these arise pursuant to the Delaware General Corporation Law), this provision does not explicitly state that Delaware law governs the interpretation and enforcement of the certificate of incorporation itself.  This may be something to think about . . . .