6.11 Indemnification and Liability Insurance

• Library: Corporations and Partnerships in Virginia (Virginia CLE) (2016 Ed.)

6.11 INDEMNIFICATION AND LIABILITY INSURANCE

6.1101 In General. A Virginia corporation may undertake to protect its directors and officers from liability either through indemnification or liability insurance.

6.1102 Indemnification. The Act's indemnification provisions are based on the Revised Model Business Corporation Act. The Official Comments to this model statute are useful in interpreting Virginia's indemnity rules.

Unless its articles of incorporation or bylaws provide otherwise, a Virginia corporation is free to indemnify its officers and directors. ²⁴¹ The only restrictions concern willful misconduct and criminal activity on the part of the officer or directors. ²⁴² Corporations are prohibited from amending their bylaws or articles to strip an officer or director of existing indemnity "with respect to any act or omission occurring before such amendment." ²⁴³ In 2005, the General Assembly amended the statute to clarify that it did not restrict a corporation's power to (i) reimburse an officer or director for expenses incurred in connection with appearing as a witness at a time when the officer or director was not named as a party to the suit, ²⁴⁴ and (ii) indemnify or advance expenses to employees who were not officers or directors. ²⁴⁵ Further,

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in 2010, the General Assembly amended the statute again to allow a corporation, by a provision in its articles of incorporation or bylaws or in a resolution adopted or a contract approved by its board of directors or shareholders, to obligate itself in advance of the act or omission giving rise to a proceeding to provide indemnification in accordance with section 13.1-697 and advance funds to pay for or reimburse expenses in accordance with section 13.1-699.

Article 10 of the Act, which concerns indemnification, has its own battery of definitions. A "director or officer" includes not only someone who is or was a director or officer, respectively, of a particular corporation but also someone who, while a director or officer of that corporation, is or was serving at the corporation's request "as a director, officer, manager, partner, trustee, employee, or agent of another . . . corporation, limited liability company, partnership, joint venture, trust, employee benefit plan, or other entity." ²⁴⁶ "Official capacity" refers to the office held by the person to be indemnified, but the definition excludes an office held at the corporation's request in any of the entities listed above. ²⁴⁷ The concept of "official capacity" is important because the standards for indemnity differ depending on whether the conduct was undertaken in an official capacity.

The Act distinguishes between the general power to authorize indemnification and the specific determination that indemnity is permissible in a particular case. Section 13.1-701 delineates the procedures for determining whether indemnification of an officer or directors is permissible. The determination resolves whether indemnification is proper and, if so, whether the sum sought by the official seeking indemnity is reasonable. Standards for this...