indemnification agreements

handshake1Most companies’ corporate bylaws or articles of incorporation contain indemnification and advancement provisions. While these provisions provide important protection for corporate executives if the individuals become the target of claims relating to their action undertaken in their corporate capacities, these provisions alone may not be provide sufficient protection. The provisions in the corporate documents may not address all of the issues that can arise and may not provide sufficient protection for the individuals when there are indemnification or advancement disputes and may not protect individuals from changes to corporate bylaws after the individuals have left the company. For these and many other reasons, well-advised corporate executives will want to have their rights memorialized in a separate, written indemnification and advancement agreement with the company, as discussed further below.
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dojAlthough it is not something that is often considered, D&O insurance is in many ways a financial tool allowing companies to manage their indemnification obligations to their directors and officers. The D&O policy’s reimbursement coverage recompenses the company when it honors its indemnification obligations to its corporate officials, and the policy’s individual coverage (usual referred to as Side A coverage) protects the individuals when the company is unable to honor its indemnification obligations, whether due to insolvency or legal prohibition.

D&O insurance is of course a critical part of corporate risk management, but the fact is that indemnification is an even more basic and comprehensive source of protection for corporate executives. Even for companies that purchase and maintain significant levels of D&O insurance, corporate indemnification provides important protection for company officials. D&O insurance is subject to limits of liability, whereas indemnification is theoretically unlimited (although, of course, practically limited by the indemnifying company’s financial resources). Indemnification is often very broad, often extending “to the maximum extent permitted by law,” whereas D&O insurance polices contain numerous exclusions and conditions. In addition, D&O insurance must be renewed each year, with possible changes in terms and conditions. Indemnification rights are much less likely to be changed, particularly, as noted below, for corporate officials who negotiate their own indemnification contracts.

Indemnification, then, is a very important consideration for all corporate directors and officers. While this has long been true, indemnification arguably has taken on an increased importance in light of the recent action by the U.S. Department of Justice. As I discussed in a post at the time (here), in September the U.S. Department of Justice released a directive —  referred to as “the Yates Memo” –restating and reinforcing the agency’s commitment to targeting corporate executives in cases of corporate wrongdoing. The cornerstone of the agency’s new policies is the specification that in order for a company to qualify for any cooperation credit in connection with a DoJ investigation, the company must provide the agency with all relevant facts about the individuals involved in the misconduct.
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masseyMost senior corporate executive have a general understanding of the importance to them of their corporate indemnification rights. As discussed here, a related but sometimes even more important corporate benefit is the right to advancement – that is, the right to have their defense fees paid on a contemporaneous basis while legal proceedings against

An important accessory to the indemnification rights of directors and officers is their right to have their defense expenses advanced while the claims against them are pending, before their ultimate right to indemnification has been determined.  A frequently recurring issue is the question of when the company may withhold advancement. This issue often arises when