Director protections: exculpation, good-faith reliance, indemnification, advancement, and insurance (Delaware)

Black-letter propositions

1. 01

   A corporation has power to indemnify a person who is a party to a threatened, pending or completed action, other than an action by or in the right of the corporation, by reason of being a director, officer, employee or agent, against expenses, judgments, fines and settlement amounts actually and reasonably incurred, if the person acted in good faith and in a manner the person reasonably believed to be in or not opposed to the corporation's best interests.

2. 02

   In a criminal proceeding the person must also have had no reasonable cause to believe the conduct was unlawful.

3. 03

   A termination of a proceeding by judgment, order, settlement, conviction or plea of nolo contendere does not of itself create a presumption that the person did not meet the standard of conduct.

4. 04

   In an action by or in the right of the corporation, such as a derivative suit, the corporation may indemnify only expenses, including attorneys' fees, actually and reasonably incurred in defense or settlement, if the person met the same good-faith standard, and it may not indemnify for any claim as to which the person was adjudged liable to the corporation unless the court decides the person is fairly and reasonably entitled to indemnity.

5. 05

   To the extent that a present or former director or officer has been successful on the merits or otherwise in defense of any proceeding, or of any claim, issue or matter in it, the corporation must indemnify the person against expenses, including attorneys' fees, actually and reasonably incurred.

6. 06

   The corporation may indemnify any other person who is not a director or officer to the extent that person has been successful on the merits or otherwise in defense of the proceeding.

7. 07

   Indemnification under the discretionary provisions, unless ordered by a court, may be made only as authorized in the specific case upon a determination that the person has met the applicable standard of conduct.

8. 08

   For a person who is a director or officer at the time of the determination, the determination is made by a majority of the directors who are not parties, even though less than a quorum, or a committee of such directors, or independent legal counsel in a written opinion if there are no such directors or they so direct, or the stockholders.

9. 09

   Expenses incurred by an officer or director in defending a proceeding may be paid by the corporation in advance of final disposition upon receipt of an undertaking by or on behalf of the officer or director to repay the amount if it is ultimately determined that the person is not entitled to indemnification.

10. 10

    The indemnification and advancement provided by the statute is not exclusive of other rights under a bylaw, agreement, vote of stockholders or disinterested directors, or otherwise.

11. 11

    A right to indemnification or advancement arising under the certificate of incorporation or a bylaw is not eliminated or impaired by a later amendment or repeal after the act or omission, unless the provision in effect at the time explicitly authorizes such elimination after the fact.

12. 12

    A corporation has power to purchase and maintain insurance on behalf of a person who is or was a director, officer, employee or agent against liability asserted against the person and incurred in that capacity, whether or not the corporation would have the power to indemnify the person against the liability.

13. 13

    A director, in performing the director's duties, is fully protected in relying in good faith on the corporation's records and on information, opinions, reports or statements presented by officers, employees, board committees, or other persons on matters the director reasonably believes are within that person's professional or expert competence and who was selected with reasonable care by or on behalf of the corporation.

14. 14

    The certificate of incorporation may eliminate or limit a director's or officer's personal liability to the corporation or its stockholders for monetary damages for breach of fiduciary duty, but not for a breach of the duty of loyalty, for acts or omissions not in good faith or involving intentional misconduct or a knowing violation of law, for an unlawful dividend or stock repurchase under section 174, or for any transaction from which the person derived an improper personal benefit.

15. 15

    An officer's exculpation does not extend to any action by or in the right of the corporation, and an exculpation provision does not eliminate liability for acts or omissions before the provision became effective.

Use this attack sequence under time

Common wrong turns

• Settlement payments and judgments can be indemnified in third-party suits, but in a derivative suit only expenses may be.
• Mandatory indemnification for a director or officer who is successful covers expenses only and turns on success on the merits or otherwise.
• Advancement requires an undertaking to repay, and the bylaws or an agreement can give rights beyond the statute.

Worked example

A director is sued by a stockholder, in a derivative action for the corporation, for breach of duty. The suit settles, and the director asks the corporation to pay the settlement amount and her attorneys' fees.

Practice this topic

Permissive indemnification

Section 145(a) of the Delaware General Corporation Law gives a corporation power to indemnify a person who is a party to a threatened, pending or completed action, suit or proceeding, other than an action by or in the right of the corporation, by reason of being a director, officer, employee or agent, against expenses, judgments, fines and amounts paid in settlement actually and reasonably incurred, if the person acted in good faith and in a manner reasonably believed to be in or not opposed to the corporation's best interests and, in a criminal proceeding, had no reasonable cause to believe the conduct was unlawful.

Section 145(a) also provides that termination of a proceeding by judgment, order, settlement, conviction or nolo contendere plea does not of itself create a presumption that the person failed to meet the standard. Section 145(b) applies to actions by or in the right of the corporation and allows indemnification only of expenses actually and reasonably incurred in defense or settlement, and forbids indemnification of any claim on which the person was adjudged liable to the corporation unless the court decides, despite the adjudication and in view of all the circumstances, that the person is fairly and reasonably entitled to indemnity.

Mandatory indemnification and who decides

Section 145(c)(1) requires the corporation to indemnify a present or former director or officer, to the extent the person has been successful on the merits or otherwise in defense of a proceeding under subsections (a) or (b), or of any claim, issue or matter in it, against expenses, including attorneys' fees, actually and reasonably incurred. Section 145(c)(2) lets the corporation indemnify other persons, such as employees and agents, to the same extent.

Section 145(d) requires that discretionary indemnification, unless ordered by a court, be authorized in the specific case on a determination that the standard of conduct was met, made for a current director or officer by a majority of the directors who are not parties, a committee of them, independent legal counsel in a written opinion, or the stockholders.

Advancement, nonexclusivity, and insurance

Section 145(e) allows expenses incurred by an officer or director in defending a proceeding to be paid in advance of final disposition upon receipt of an undertaking to repay the amount if it is ultimately determined that the person is not entitled to indemnification. Section 145(f) provides that the statutory rights are not exclusive of rights under a bylaw, agreement, stockholder or disinterested director vote or otherwise, and that a right arising under the certificate or bylaws is not eliminated by a later amendment unless the provision explicitly authorizes it.

Section 145(g) gives a corporation power to purchase and maintain insurance on behalf of a director, officer, employee or agent against liability asserted against the person in that capacity or arising from that status, whether or not the corporation would have the power to indemnify the person against that liability.

Reliance and exculpation

Section 141(e) fully protects a director, in performing the director's duties, who relies in good faith on the corporation's records and on information, opinions, reports or statements presented by officers, employees, board committees or other persons on matters the director reasonably believes are within the person's professional or expert competence, if the person was selected with reasonable care by or on behalf of the corporation.

Section 102(b)(7) permits the certificate of incorporation to eliminate or limit a director's or officer's personal liability for monetary damages for breach of fiduciary duty, but the provision may not limit liability for a breach of the duty of loyalty, for acts or omissions not in good faith or involving intentional misconduct or a knowing violation of law, for unlawful dividends or repurchases under section 174, or for any improper personal benefit. It also may not limit an officer's liability in an action by or in the right of the corporation, and it does not apply to acts before the provision became effective.

Frequently asked questions