Corporate Indemnification-part Ii
| Publication year | 1984 |
| Pages | 1634 |
| Citation | Vol. 13 No. 9 Pg. 1634 |
1984, September, Pg. 1634. Corporate Indemnification-Part II
In the last issue of The Colorado Lawyer, this column discussed the limited scope of the Colorado statute dealing with the ability of a corporation to indemnify its officers and directors, as well as the broader provisions of the Model Business Corporation Act and the statutes of other states. There was also a discussion of the right of directors and officers in certain circumstances to require the corporation to indemnify them, even over objections of other members of the Board of Directors. In some cases, regardless of how broad the statutory or charter indemnification provisions may be and regardless of the generosity of the Board of Directors in granting indemnification, indemnification would be against public policy and, if the question were raised, a court would set it aside.
In addition, the Securities and Exchange Commission ("SEC") has some specific guidelines regarding indemnification. Section 11 of the Securities Act of 1933 ("Securities Act") provides guidance for persons connected with a company filing a registration statement under that Act in avoiding liability for registration statements that prove to be false or misleading. Persons who comply with their § 11 obligations should be indemnifiable under both state law and public policy. This article discusses when a corporation may not indemnify and the question of good faith relating to the Securities Act.
There are numerous circumstances in which a court will not permit a corporation to indemnify its officers or directors. First, indemnification will not be granted in the event the person seeking indemnification was acting for his own benefit rather than that of the corporation.
In Matter of Southwest Restaurant Systems, Inc., indemnification was denied because there was no finding that the directors acted in good faith and, according to the court, the legal services for which indemnification was sought were solely for the individual and not for the benefit of the corporation.(fn1) In Orbit Gas Co. v. Arnett, the court found that the actions of the individuals in shareholder action against them (soliciting proxies and casting the votes obtained thereby) were for the individual's own benefit, not that of the corporation.(fn2)
Koch Industries, Inc. v. Vosko was a complex case in which Vosko had sold a privately held company to Koch Industries. Eventually, the parties sued each other for common law fraud, securities fraud and breach of contract. Since some of Koch's claims against Vosko arose from the time Vosko was a director of the company he sold to Koch, Vosko sought indemnification from Koch for the expenses of his defense. Although the court found Koch liable for fraud and breach of contract, it would not grant Vosko indemnification "because the litigation arose by reason of his acts as an individual and not in execution of his official duties."(fn3)
Second, indemnification will not be granted and is probably not even permissible in the event the person seeking indemnification is found liable for common law fraud or violation of federal securities laws.
It is likely that a court would deny indemnification because a person who committed such actions likely violated his legal and fiduciary duties to the corporation and its shareholders. This person could not be said to have acted in "good faith," which is a condition precedent to being allowed indemnification under a statute. Indemnification in such circumstances would probably not be allowed even if corporate articles, bylaws or other agreements allowed for broader indemnification because of the public policy in favor of making individuals liable for their own wrongful acts.
This situation is even clearer in the case of public companies. The SEC has long taken a dim view of arrangements whereby directors or officers of a corporation may seek indemnification for expenses incurred in defending violations of the federal securities laws.
Each prospectus included as a part of a registration statement filed under the Securities Act must contain at least the following statement required by Item 510 of Regulation S-K:
Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers or persons controlling the registrant pursuant to the foregoing provisions, the registrant has been informed that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act...
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