Corporations Unit 8

8/7/2019 Corporations Unit 8

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Unit 9: Indemnification andInsurance (and Exculpation)

KRB: 508-520 & Associated

Codes


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Indemnification v. Insurance v.

Exculpation Indemnification:

Corporation pays thedamages owed by D&Os

Prospective, ongoing orretrospective

May include legal fees

Big picture(s): whenmandatory & whenpermitted?

Insurance Third-party company

(insurance) pays for D&Osdamages

(State) public policy limitsscope

Moral hazard concerns

Exculpation: Damages claims are extinguished (or limited) by corporatecharter provision


3/25

Liability Limitation Statutes

DGCL 102(b)(7) provides that acorporation's articles of incorporation may

(but need not) contain: A provision eliminating or limiting the personalliability of a director to the corporation or itsstockholders for monetary damages for

breach of fiduciary duty as a director ....


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Liability Limitation Statutes

provided that such provision shall not eliminate orlimit the liability of a director:

(i) For any breach of the director's duty of loyalty to the

corporation or its stockholders; (ii) for acts or omissions not in good faith or which

involve intentional misconduct or a knowing violation oflaw;

(iii) under 174 of this title [relating to liability for

unlawful dividends]; or (iv) for any transaction from which the director

derived an improper personal benefit

Disney:conduct motivated by

subjective bad faith (i.e.,an actual intent to doharm)

intentional derelictionof duty, a conscious

disregard for onesresponsibilities


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Noteworthy Points

Applies only to directors.

Although officers also are subject to a duty ofcare, they are denied exculpation by charterprovision.

Arnold v. Society for Savings Bancorp, Inc. (Del.):As to a defendant who is both a director and anofficer, a 102(b)(7) provision applies only to

actions taken solely in his capacity as a director.


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Noteworthy Points

Limits only the monetary liability ofdirectorsequitable remedies are still

available A 102(b)(7) provision is an affirmativedefense


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Indemnification Statutes

At common law, corporate employees wereentitled to indemnification for expensesincurred on the job, including certain legalliabilities, but directors were not.

Today, all states have statutory provisionsauthorizing director indemnification to some

degree.


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Delaware Law: Coverage

As to suits by shareholders or third parties,145(a) authorizes the corporation acorporation shall have power to indemnify thedirector or officer for expenses plus "judgments,

fines, and amounts paid in settlement" of bothcivil and criminal proceedings. if the person acted in good faith and in a manner the

person reasonably believed to be in or not opposed tothe best interests of the corporation, and, with respect

to any criminal action or proceeding, had noreasonable cause to believe the persons conductwas unlawful


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Delaware Law: Coverage

As to suits brought by or on behalf of thecorporation, 145(b) authorizes a corporationshall have power indemnification only for

expenses, albeit including attorney's expenses. if the person acted in good faith and in a manner theperson reasonably believed to be in or not opposed tothe best interests of the corporation

If the director or officer was held liable to the

corporation, he may only be indemnified with courtapproval


10/25

Delaware Law: Mandatory versus

Permissive Indemnification Under 145(c), the corporation mustindemnify a director or officer who "hasbeen successful on the merits or

otherwise." As for directors and officers who are

unsuccessful, check whether indemnificationis allowed by 145(a) or (b)

If so, the corporation may but need not indemnify the director or officer


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Delaware Law: Advancement of

Expenses Under 145(e), the corporation may advanceexpenses to the officer or director provided thelatter undertakes to repay any such amount if it

turns out he is not entitled to indemnification.


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Delaware Law: Indemnification by

Agreement 145(f) authorizes the corporation to enter intowritten indemnification agreements with officersand directors that go beyond the statute:

statutory indemnification rights "shall not bedeemed exclusive of any other rights" toindemnification created by "bylaw, agreement,vote of the stockholders or disinterested

directors or otherwise."


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Waltuch


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Waltuch: CFTC

Which operative section applies: 145(a),145(b) or 145(c)?

145(a) Sued by third parties


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Waltuch: CFTC Litigation

How to square 145(a)s restriction thatpower to indemnify . . . if he acted ingood faithwith 145(f)s reservation thatthe powers granted in the othersubsections . . . shall not be deemedexclusive.

Consistency Statutory parsing


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Opposing Canons of Statutory

Construction There are two opposing cannons [of statutoryconstruction] on almost any point. KarlLlewellyn

Canon #1: Remedial statutes should be liberallyconstrued so as to effect their purposes.

Canon #2: Rules in derogation of the commonlaw should be strictly and narrowly construed.

Grant of power 145(f) grants no new powers


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Waltuch: The CFTC Proceeding

Can Waltuch be indemnified per the agreement?

Would indemnification per Article 9 be inconsistent withthe 'scope' of the corporation's power to indemnify, as

delineated in 145(a)? Yes. Where the statute requires good faith, as it does in

both subsections (a) and (b), an agreement that purportseven by implication to authorize indemnification for non-good faith conduct is inconsistent with the scope of the

statute. Why cant Waltuch try to prove he acted in good faith?


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Waltuch: Private Litigation

145(c): if successful on the merits orotherwise in defense of any action . . . Heshall be indemnified against expenses . . .reasonably incurred . . .


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Waltuch: Private

Holding?

"The only question a court may ask is what theresult [of the underlying litigation] was, not why it

was." Unlike subsections (a) and (b), there is no good

faith limitation under 145(c).

Accordingly, success for purposes of subsection

(c) does not require "moral exoneration." It only requires escape.


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The Good Faith Provision

Why did the legislature omit a requirement of good faithfrom the mandatory indemnification provision in Section145(c)?

Avoid collateral litigation? Do not chill directors from taking risks.

Encourage people to serve as directors of Delawarecorporations, and thereby also encourageincorporators to incorporate in Delaware, by providingthem with maximum protection.


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Waltuch: Misreading Article 9th?

The Corporation shall indemnify . ..except in relation to matters . . . he shallbe adjudged . . . liable for negligence ormisconduct in the performance of a duty.

He paid $100,000 to the CFTC & agreedto a ban. Isnt that an adjudication of

wrongdoing? Why not so hold?


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Citadel: Background Law

What do 145(b) and (c) provide If he loses, under b, he cant get indemnified for this

kind of suit

If he wins, under c, he must be indemnified for thiskind of suit

Can Paragraphs 5 & 7, read together with145(e) mean that the corporation mayindemnifywhen he loses (or must?)

What is the upshot? Corporation must advance pursuit to Paragraph 7,

even though if he loses, he will have to return.


23/25

Citadel

How could we have drafted paragraphs 5and 7 to achieve a reasonable result anddecrease the likelihood of litigation?

What did the parties want?

How did they fail?

Paragraph 5 doesnt distinguish between

successful and unsuccessful claims Paragraph 7 should have provided that you get

advances, but if you lose, you must return them.


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Drafting

Lets give it a try!

The Corporation shall not be obligated

under this Agreement to make a paymentin regard to any liability or expense of theAgent: (e) . . .

Costs and expenses (including AFs)incurred by the Agent . . .


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Insurance

If you were running an insurance companythat wrote D&O policies, how would youmanage your business to minimizepayouts?

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Corporations Unit 8

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