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• Expressly stating that the indemnification rights constitute a contract, areintended to be retroactive to events occurring prior to their adoption and shallcontinue to exist after the rescission or restrictive modification of the provisionwith respect to events occurring prior to that rescission or modification.Alternatively, a separate indemnification contract could be executed by thecorporation and the director or officer.• Expressly stating that any director or officer who serves on behalf of asubsidiary of the corporation or any employee benefit plan of the corporationor such subsidiary is deemed to be providing such service at the request ofthe corporation. Thus, a director or officer of a subsidiary will be entitled toindemnification from both the subsidiary and the parent company.• Requiring indemnification of expenses incurred by a director or officer as a plaintiffin a suit only if the board of directors approves prosecution of the suit by thedirector or officer.2. Gaps in protection under indemnification statutesThere are a number of obvious gaps in the protections afforded to directors by stateindemnification statutes:• Most state indemnification statutes permit indemnification only if the director’sor officer’s conduct was in good faith and he or she reasonably believed that theconduct was in the best interests of the corporation or at least not opposed tothe corporation’s best interests. In the case of criminal proceedings, the director orofficer must have had no reasonable cause to believe the conduct was unlawful.Conduct violating these standards may not be indemnified.• Most state indemnification statutes prohibit indemnification of settlements andjudgments in claims by or on behalf of the corporation, including shareholderderivative lawsuits.• Even with respect to defense costs incurred in derivative lawsuits,indemnification is not permitted under most state statutes if the director orofficer is adjudged liable to the corporation, unless and only to the extent acourt determines that the defendant director is fairly and reasonably entitled toindemnification for the expenses.• The appropriate decision-making body (the board, the shareholders orindependent legal counsel) may be unable or unwilling to conclude that thedirector has met the required standard of conduct. This may be a particularproblem if control of the institution has changed hands or the facts as to theindividual’s conduct are in dispute.• The SEC takes the position that indemnification by a corporation of directors,officers or controlling persons against liabilities arising under certain of the federalsecurities laws is against public policy and unenforceable. The SEC argues thatthe purpose of the securities laws is, at least in part, to provide deterrence againstnegligence and other misconduct by directors and officers, and that this deterrenteffect would be reduced or eliminated if the directors and officers could beindemnified. This position has been upheld by many courts.25Financial institutions guide