Presenting a live 90-minute webinar with interactive Q&A D&O Indemnification Provisions in Governance Documents and Agreements Drafting Effective Indemnity and Advancement Agreements to Protect Directors and Officers From Personal Liability TUESDAY, JULY 10, 2012 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific Today’s faculty features: Dan A. Bailey, Member, Bailey Cavalieri , Columbus, Ohio Amy L. Goodman, Partner, Gibson Dunn & Crutcher , Washington, D.C. John F . Grossbauer, Partner, Potter Anderson & Corroon , Wilmington, Del. The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10 .
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D&O Indemnification Provisions in Governance Documents and Agreements Presentation to: Strafford Webinars and Publications July 10, 2012 Amy Goodman
<Presentation Title/Client Name> An Overview of D&O Protection • The Three-Legged Stool of Protection – Exculpation – Indemnification/Advancement – Insurance 6
<Presentation Title/Client Name> An Overview of D&O Protection cont’d • Exculpation – Statutory right of a corporation to limit or eliminate personal monetary liability of directors to the corporation and its stockholders from claims resulting from directors’ breach of their fiduciary duty of care (Delaware General Corporations Law (“DGCL”) § 102(b)(7)) • Must be included in a corporation’s certificate of incorporation – Does not protect a director from claims relating to: • Breaches of duty of loyalty • Acts or omissions not in good faith or involving intentional misconduct or a knowing violation of law – Does not protect officers 7
<Presentation Title/Client Name> An Overview of D&O Protection cont’d • Indemnification/Advancement – Indemnification : Compensates directors and officers for losses arising out of conduct relating to their position with the corporation • Under Delaware law, a corporation: – Must indemnify directors and officers that are “successful on the merits or otherwise” – May, but is not required to, provide mandatory or permissive indemnification to employees and agents – Advancement : Provides directors and officers with legal fees and expenses in advance of final disposition of the proceeding • Under Delaware law, a corporation may, but is not required to, provide mandatory or permissive advancement to any or all of its directors, officer, employees and agents • D&O Insurance Policies – Provides protection to directors and officers for claims that the corporation either cannot (legally or financially) indemnify or if indemnification is permissive, refuses to indemnify 8
A. Permissive v. Mandatory B. Protected Persons C. Outside Positions D. Covered Claims E. Standard of Conduct F. Indemnifiable Losses G. Defense Cost Advancement H. Non-Exclusivity Provision 9
<Presentation Title/Client Name> Drafting Considerations: Who Is Protected? • Directors and Officers – Indemnification and advancement provisions can provide mandatory and permissive coverage • Mandatory coverage: subject to certain limitations, the corporation must advance expenses and/or indemnify losses • Permissive coverage: the corporation may, in its discretion, decide whether to advance expenses and/or indemnify losses – Delaware law requires that a corporation provide mandatory indemnification to a director or officer if he or she is “successful on the merits or otherwise” • A corporation may, but is not required to, provide indemnification in other situations – Directors must still meet the statutory standard of conduct by acting “in good faith” and “in a manner the person reasonably believed to be in or not opposed to the best interests of the corporation” – For a criminal proceeding, the person must also have had “no reasonably cause to believe the person’s conduct was unlawful” – Advancement to directors and officers is permissive under Delaware law • A corporation can provide mandatory, permissive or no advancement rights to directors and officers 10
<Presentation Title/Client Name> Drafting Considerations: Who Is Protected? • Distinguishing Between Directors and Officers – Historically, most corporations provided identical indemnification and advancement rights to directors and officers, although some exceptions existed • Example : “Notwithstanding the foregoing…no advance shall be made by the corporation to an officer of the corporation…in any action, suit or proceeding…if a determination is reasonably and promptly made (i) by the board of directors…or (ii )…by independent legal counsel in a written opinion…that such person acted in bad faith or in a manner that such person did not believe to be in or not opposed to the best interests of the corporation .” – Post-Enron, commentators and some corporations have begun to consider distinguishing between the rights afforded to directors and to officers, particularly with regard to advancement • Broad advancement rights can result in a company continuing to advance legal expenses even after it is clear that an individual engaged in misconduct • However, unlike directors, officers are not protected by the business judgment rule and thus, may have a greater need for protection 11
<Presentation Title/Client Name> Drafting Considerations: Who Is Protected? • Directors and Officers as Plaintiffs – Broadly drafted provisions could require indemnification and advancement to a director or officer who is personally suing the corporation • Delaware courts will require indemnification or advancement if the court views the suit as furthering the plaintiff’s duties to the company – A corporation can limit its exposure by providing that indemnification and advancement are not available for proceedings initiated by the director or officer other than: • Proceedings to enforce the terms of indemnification provisions themselves; • Mandatory counterclaims that must be made or waived by a defendant; and • Proceedings authorized by the board of directors 12
<Presentation Title/Client Name> Drafting Considerations: Who Is Protected? • Employees and Agents – Indemnification and advancement for employees and agents is permissive under Delaware law – A corporation can: • Grant mandatory advancement and/or indemnification to employees and agents; • Grant permissive advancement and/or indemnification at the corporation’s discretion to employees and agents; or • Be silent on advancement and/or indemnification to employees and agents – Indemnifying employees and agents can help attract quality individuals but can also result in substantial potential liability for a corporation – Historically, some companies provided mandatory indemnification and advancement to all employees and agents – Modern practice is to grant only permissive indemnification and advancement to employees and agents 13
D&O Indemnification Provisions in Governance Documents and Agreements John F. Grossbauer, Esq. Strafford Webinar and Publications July 10, 2012
Scope of Protection Under Delaware Law Section 145 of the Delaware General Corporation Law provides the framework for analysis. Case law makes clear that, while bylaws and agreement may vary the process by which indemnification and advancement is provided, the substance of what may be covered by indemnification and advancement is limited by the public policy expressed in Section 145 (a) through (e).
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