Unit 9: Indemnification and

Insurance (and Exculpation)

KRB: 508-520 & Associated

Codes
 Indemnification v. Insurance v.
Exculpation
• Indemnification: • Insurance
– Corporation pays the – Third-party company
damages owed by D&Os (insurance) pays for D&Os’
– Prospective, ongoing or damages
retrospective – (State) public policy limits
– May include legal fees scope
– Moral hazard concerns
– Big picture(s): when
mandatory & when
permitted?

Exculpation: Damages claims are extinguished (or limited) by corporate

charter provision
 Liability Limitation Statutes
• DGCL §102(b)(7) provides that a
corporation's articles of incorporation may
(but need not) contain:
– A provision eliminating or limiting the personal
liability of a director to the corporation or its
stockholders for monetary damages for
breach of fiduciary duty as a director ....
Disney:
Liability Limitation Statutes
•conduct motivated by
subjective bad faith (i.e.,
an actual intent
– provided to doprovision shall not eliminate or limit
that such
harm)
the liability of a director:
•“intentional dereliction
• (i) For any breach of the director's duty of loyalty to the
ofcorporation
duty, a conscious
or its stockholders;
disregard for one’s
• (ii) for acts or omissions not in good faith or which
responsibilities”
involve intentional misconduct or a knowing violation of
law;
• (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
 Noteworthy Points
• Applies only to directors.
– Although officers also are subject to a duty of
care, they are denied exculpation by charter
provision.
• Arnold v. Society for Savings Bancorp, Inc. (Del.):
As to a defendant who is both a director and an
officer, a §102(b)(7) provision applies only to
actions taken solely in his capacity as a director.
 Noteworthy Points
• Limits only the monetary liability of
directors—equitable remedies are still
available
• A §102(b)(7) provision is an affirmative
defense
 Indemnification Statutes
• At common law, corporate employees were
entitled to indemnification for expenses
incurred on the job, including certain legal
liabilities, but directors were not.
– Today, all states have statutory provisions
authorizing director indemnification to some
degree.
 Delaware Law: Coverage
• As to suits by shareholders or third parties,
§145(a) authorizes the corporation – “a
corporation shall have power” – to indemnify the
director or officer for expenses plus "judgments,
fines, and amounts paid in settlement" of both
civil and criminal proceedings.
– “if the person acted in good faith and in a manner the
person reasonably believed to be in or not opposed to
the best interests of the corporation, and, with respect
to any criminal action or proceeding, had no
reasonable cause to believe the person’s conduct
was unlawful”
 Delaware Law: Coverage
• As to suits brought by or on behalf of the
corporation, §145(b) authorizes – “a corporation
shall have power” – indemnification only for
expenses, albeit including attorney's expenses.
– “if the person acted in good faith and in a manner the
person reasonably believed to be in or not opposed to
the best interests of the corporation”
– If the director or officer was held liable to the
corporation, he may only be indemnified with court
approval
 Delaware Law: Mandatory versus
Permissive Indemnification
• Under §145(c), the corporation must
indemnify a director or officer who "has
been successful on the merits or
otherwise."
– As for directors and officers who are
unsuccessful, check whether indemnification
is allowed by §145(a) or (b)
– If so, the corporation may – but need not –
indemnify the director or officer
Delaware Law: Advancement of
Expenses
• Under §145(e), the corporation may advance
expenses to the officer or director provided the
latter undertakes to repay any such amount if it
turns out he is not entitled to indemnification.
 Delaware Law: Indemnification by
Agreement
• § 145(f) authorizes the corporation to enter into
written indemnification agreements with officers
and directors that go beyond the statute:
statutory indemnification rights "shall not be
deemed exclusive of any other rights" to
indemnification created by "bylaw, agreement,
vote of the stockholders or disinterested
directors or otherwise."
Waltuch
 Waltuch: CFTC
• Which operative section applies: § 145(a),
145(b) or 145(c)?
– 145(a)
– Sued by third parties
 Waltuch: CFTC Litigation
• How to square 145(a)’s restriction that
“power to indemnify . . . if he acted in
good faith” with 145(f)’s reservation that
the powers granted in the “other
subsections . . . shall not be deemed
exclusive”.
– Consistency
– Statutory parsing
 Opposing Canons of Statutory
Construction
• “There are two opposing cannons [of statutory
construction] on almost any point.” – Karl
Llewellyn
• Canon #1: Remedial statutes should be liberally
construed so as to effect their purposes.
• Canon #2: Rules in derogation of the common
law should be strictly and narrowly construed.
– Grant of power
– 145(f) grants no new powers
 Waltuch: The CFTC Proceeding
• Can Waltuch be indemnified per the agreement?
• Would indemnification per Article 9 “be inconsistent with
the '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
purports even by implication to authorize indemnification
for non-good faith conduct is inconsistent with the scope
of the statute.
• Why can’t Waltuch try to prove he acted in good faith?
 Waltuch: Private Litigation
• 145(c): if “successful on the merits or
otherwise in defense of any action . . . He
shall be indemnified against expenses . . .
reasonably incurred . . .”
 Waltuch: Private
• Holding?
– "The only question a court may ask is what the
result [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.
 The Good Faith Provision
• Why did the legislature omit a requirement of good faith
from the mandatory indemnification provision in Section
145(c)?
– Avoid collateral litigation?
– Do not chill directors from taking risks.
– Encourage people to serve as directors of Delaware
corporations, and thereby also encourage
incorporators to incorporate in Delaware, by providing
them with maximum protection.
Waltuch: Misreading Article 9th?
• “The Corporation shall indemnify . .
.except in relation to matters . . . he shall
be adjudged . . . liable for negligence or
misconduct in the performance of a duty.”
• He paid $100,000 to the CFTC & agreed
to a ban. Isn’t that an adjudication of
wrongdoing? Why not so hold?
 Citadel: Background Law
• What do 145(b) and (c) provide
– If he loses, under b, he can’t get indemnified for this
kind of suit
– If he wins, under c, he must be indemnified for this
kind of suit
• Can Paragraphs 5 & 7, read together with 145(e)
mean that the corporation may indemnify when
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.
 Citadel
• How could we have drafted paragraphs 5
and 7 to achieve a reasonable result and
decrease the likelihood of litigation?
– What did the parties want?
– How did they fail?
• Paragraph 5 doesn’t distinguish between
successful and unsuccessful claims
• Paragraph 7 should have provided that you get
advances, but if you lose, you must return them.
 Drafting
• Let’s give it a try!
• “The Corporation shall not be obligated
under this Agreement to make a payment
in regard to any liability or expense of the
Agent: (e) . . . “
• “Costs and expenses (including AFs)
incurred by the Agent . . .”
 Insurance
• If you were running an insurance company
that wrote D&O policies, how would you
manage your business to minimize
payouts?