§ 1.7.5.1 MANDATORY INDEMNIFICATION OF DIRECTORS.

• Jurisdiction: Arizona

§ 1.7.5.1 Mandatory Indemnification of Directors. A.R.S. § 10-852(A) creates a right of indemnification for corporate directors. Unless limited by the corporation's articles of incorporation, directors are entitled to mandatory indemnification of their reasonable expenses if they are the prevailing party, "on the merits or otherwise, in defense of any proceeding to which they are a party because they were a director of the corporation.²² The requirement that a corporate director be made a party to a proceeding "because" he or she was a director of the corporation is broadly construed.²³ "Any proceeding" presumably includes any civil, criminal or derivative action or arbitration.²⁴ Moreover, due to the lack of limiting language, the statute presumably applies to a direct action brought by a corporate employer against a director for malfeasance in office.²⁵

There is no Arizona case law that defines what it means to be a prevailing party to achieve success "on the merits or otherwise." Other jurisdictions, however, have provided guidance.²⁶ When determining success on the merits, for example, Delaware courts do not look "behind the result." In Delaware, it is the outcome, not the how or the why of the outcome, that determines whether success on the merits has been achieved.²⁷ Dismissal of a lawsuit with prejudice without paying any money is considered to be success on the merits.²⁸ Likewise, dismissal with prejudice based on a technical or procedural defense such as the statute of limitations is considered to be success on the merits "or otherwise."²⁹ Dismissal without prejudice, however, is not success on the merits.³⁰ Dismissal by way of settlement can be success on the merits if a defendant does not admit liability and pays no money as part of the settlement.³¹

Directors defend a proceeding "to which they are a party because they were a director of the corporation" when they act...