Chapter 6 - § 6.3 • STRATEGIES FOR REDUCING AND MITIGATING RISK

• Jurisdiction: Colorado

§ 6.3 • STRATEGIES FOR REDUCING AND MITIGATING RISK

Having identified the likely types and sources of risk, the nonprofit organization should take the further step of implementing strategies to reduce the potential for a loss occurrence and, if a loss does occur, to mitigate its impact. This section discusses steps that can be taken with respect to directors and officers of the nonprofit corporation as well as the nonprofit entity itself.

§ 6.3.1—Indemnification of Directors, Officers, and Agents

The liability of directors, officers, and other agents of the nonprofit may be limited by statute, by the formation documents of the nonprofit, or by contract.

Statutory Indemnification

A person is entitled to reimbursement for reasonable expenses if he or she is wholly successful on the merits in the defense of a proceeding arising out of that person's service as a director or officer of the nonprofit. C.R.S. §§ 7-129-103 and -107(1)(a). The corporation may limit this right in its articles of incorporation. In addition, under certain circumstances, a person may seek court-ordered indemnification. C.R.S. §§ 7-129-105, and -107(1)(a).

A nonprofit may also indemnify a director, officer, employee, fiduciary, or agent for any civil liability incurred by that person arising out of his or her service on behalf of the nonprofit, other than proceedings brought by or in the name of the nonprofit (e.g., a derivative suit), if (1) the person conducted himself or herself in good faith, and (2) the person reasonably believed that (a) when acting in an official capacity, the conduct was in the best interests of the nonprofit, and (b) in all other cases, his or her conduct was at least not opposed to the nonprofit's best interests. C.R.S. § 7-129-102(1). A nonprofit may indemnify a person for criminal liability, other than in a derivative suit, in addition to the criteria specified above, if the person had no reasonable cause to believe that his or her conduct was unlawful. C.R.S. §§ 7-129-102(1)(c) and -107(1)(a).

With respect to derivative suits, the scope of the permitted indemnification is limited to reasonable expenses incurred in connection with the proceeding. C.R.S. § 7-129-102(5).

A "disinterested party" must determine that indemnification is proper under the circumstances. C.R.S. § 7-129-106. Qualified "disinterested parties" include, depending on the facts and circumstances, (1) a majority of disinterested directors, (2) a committee of disinterested directors, or (3) if either a quorum of disinterested directors cannot be obtained or a committee cannot be established, or the quorum group or the committee so directs, then by either (a) independent legal counsel or (b) the disinterested voting members. Id.

Colorado law prohibits a nonprofit from indemnifying a person if the person is adjudged liable in a derivative suit (C.R.S. § 7-129-102(4)(a)) or the person is adjudged liable on the basis of deriving an improper personal benefit (C.R.S. § 7-129-102(4)(b)). Moreover, if a nonprofit with voting members provides indemnification or advances expenses in a derivative suit, the nonprofit must give written notice of the indemnification or the advance with or before the notice of the next voting members' meeting. If the next voting members' action is taken without meeting (e.g., by written consent), "at the instigation of the board of directors, such notice shall be given to the voting members at or before the time the first voting member signs a writing consenting to such action." C.R.S. § 7-129-110.

Advancement of Expenses

Although directors and officers generally take comfort in their ability to obtain indemnification from the nonprofit corporation, most individuals can ill afford to cover their costs of defense until final disposition of an adverse proceeding. Therefore, Colorado law permits nonprofit corporations to advance...