Indemnification Agreements, 0114 SCBJ, SC Lawyer, January 2014, #1

Author:David Anna
 
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Indemnification Agreements

2014 #1

South Carolina Bar Journal

January, 2014

xA0xA0xA0xA0xA0xA0xA0xA0xA0 ADDING ANOTHER LAYER OF PROTECTION FOR DIRECTORS AND OFFICERS

xA0xA0xA0xA0xA0xA0xA0xA0xA0 David Anna

xA0xA0xA0xA0xA0xA0xA0xA0xA0Introduction

xA0xA0xA0xA0xA0xA0xA0xA0xA0It's 2007, and your corporation, which has a conglomeration of diversified businesses, has grown with the real estate market and now derives a majority of its revenue from the commercial and residential real estate market. The real estate market crashes. Your corporation's revenue plummets, and suddenly your corporation cannot timely pay its debts as they become due. Your corporation's stock price plummets. Shareholders are infuriated. Your corporation's board of directors is sued for breaches of fiduciary duty. Your directors want to be protected and defend this lawsuit because they believe they did not violate any fiduciary duties.

xA0xA0xA0xA0xA0xA0xA0xA0xA0Indemnification encourages directors and officers to serve on behalf of a corporation by reimbursing a director or officer under certain circumstances for liabilities and expenses incurred in connection with a proceeding or lawsuit relating to such person's role as a director or officer. Indemnification agreements generally between a director/officer and corporation are becoming more popular and gaining attention as an additional tool to attract, retain and protect directors and officers. The S.C. Code of Laws (the "Code") provides certain indemnification and advancement of expense protections for directors and officers, and generally every corporation will provide indemnification protections in its certificate of incorporation and/or bylaws. In addition, some corporations opt to obtain directors and officers insurance coverage.

xA0xA0xA0xA0xA0xA0xA0xA0xA0On top of all of these protections, indemnification agreements provide a tool to grant additional protections to a corporation's officers and directors. Directors and officers view indemnification agreements as a tool to lock in indemnification and advancement protections because unlike provisions set forth in a corporation's articles of incorporation and/or bylaws, an indemnification agreement generally requires that specific director's or officer's consent to amend or modify the indemnification agreement. Also, because it is a contractual arrangement, an indemnification agreement can be tailored for a particular individual and typically provides more flexibility compared to provisions in the Code or in a corporation's governing documents. When drafting an indemnification agreement, a corporation should review its existing coverage (provided in the corporation's articles of incorporation, bylaws and/or any existing director and officer insurance policies) to determine areas where gaps may exist and can be filled (assuming filling any such gaps is consistent with the corporation's objectives).

xA0xA0xA0xA0xA0xA0xA0xA0xA0This article will first provide a general overview of the indemnification and advancement sections set forth in the Code, then will briefly discuss indemnification and advancement provisions addressed i n a corporation's governing documents, and will provide an overview of indemnification agreements, including practice drafting examples of pro-corporation and pro-officer/director indemnification and advancement provisions that could be included in an indemnification agreement. This article will conclude by addressing some considerations with respect to directors and officers insurance coverage.

xA0xA0xA0xA0xA0xA0xA0xA0xA0S.C. Code of Laws: indemnification and advancement sections

xA0xA0xA0xA0xA0xA0xA0xA0xA0In general, for a corporation incorporated in the State of South Carolina (note that, in general, the following Code provisions only apply to a corporation incorporated in the State of South Carolina), the Code's indemnification and advancement protections include the following:

(1) Section 33-8-510 of the Code grants a corporation the permissive authority to indemnify a current or former director against liabilities incurred in a proceeding if the director meets certain specified standards of conduct including, but not limited to, that such director acted in good faith1 (in general, the determination whether the standard of conduct has been met may be made by, among other parties, the corporation's board of directors, special legal counsel or the corporation's shareholders2).

(2) Unless a corporation's articles of incorporation state otherwise, section 33-8-520 of the Code requires a corporation to indemnify a current or former director who is wholly successful in the defense of a proceeding to which he or she was a party in his or her role as a director against reasonable expenses incurred in such proceeding.3

(3) Section 33-8-530 of the Code grants a corporation the permissive authority to pay reasonable expenses incurred by a director in advance of the conclusion of the proceeding assuming certain conditions are met, including (a) that the director gives the corporation a written confirmation that he/she has met the standard of conduct applicable in section 33-8-510 of the Code and (b) that the director executes a written undertaking pursuant...

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