Know the risks - Zurich

Most indemnification statutes distinguish between derivative actions and third-partyactions. Derivative actions are actions in the name and on behalf of the corporation,and the recovery, if any, goes to the corporation. Because of the circular nature ofany settlement or judgment, a director’s right to be indemnified in connection witha derivative action is more limited than the right to be indemnified with respect tothird-party actions. For example, under Delaware law and in many other states, adirector may be indemnified against expenses (including attorney’s fees) incurred inthe defense of a derivative action unless he was adjudged liable for negligence ormisconduct, but may not be indemnified against any judgment or settlement in anysuch derivative action. With respect to third-party actions, on the other hand, thecorporation may indemnify directors against expenses, judgments, fines and amountspaid in settlement, provided that in either case the director acted “in good faith and ina manner he reasonably believed to be in or not opposed to the best interests of thecorporation” (and, with respect to criminal actions, if he had no reasonable cause tobelieve his conduct was unlawful).Indemnification under Delaware law must be authorized in each case upon adetermination that indemnification is proper because the director has met thestandard of conduct described above. This determination must be made either bythe board of directors (by a majority vote of a quorum of directors who were notparties to the suit), by independent legal counsel or by the shareholders. The statutesgenerally also allow advances of expenses during the pendency of the lawsuit,although specific language in the charter or bylaws may be needed to clarify theright to advancement.The indemnification protections set forth in most states’ indemnification statutesare permissive in nature. Therefore, except in certain limited circumstances, aninstitution is not required to indemnify a director or officer unless the corporation’sarticles of incorporation, by-laws, or other corporate documents specificallymandate such indemnification. An institution intending to provide the broadestscope of indemnification for its directors and officers should include the followingfeatures in its internal indemnification provision:• Providing for indemnification “to the fullest extent permitted by law.”• Requiring indemnification, rather than merely permitting the corporationto indemnify.• Requiring the advancement of defense expenses, subject only to an unsecuredobligation to repay the expenses if a court subsequently determines theindemnification was not permitted.• Shifting the burden of proof to the corporation to prove that the director orofficer is not entitled to the requested indemnification.• Requiring the corporation to reimburse the director or officer for any expensesincurred in an indemnification claim against the corporation if the director orofficer is successful in whole or in part.• Providing that the director or officer has a right to an appeal or an independent denovo determination as to indemnification entitlement.24Financial institutions guide