For your more robust personal protection: yes, you need a personal indemnification agreement ... and here is what should be in it and what it should cover.

• Author: Huskins, Priya Cherian
• Position: DIRECTOR LIABILITY

DIRECTORS AND OFFECERS of corporations face the risk of personal liability for actions performed and decisions made on behalf of the corporation. Perhaps unknowingly, many directors and officers unnecessarily accept an enhanced risk of personal liability by failing to insist on a personal indemnification agreement--a relatively common agreement that obligates the corporation to indemnify a director or officer for his or her actions.

Directors and officers likely fail to insist on indemnification agreements because of their:

-- misplaced trust in the effectiveness of protections found in corporate bylaws,

-- belief that the coverage provided by director and officer liability insurance is sufficient, and

-- failure to appreciate that, in the face of a governmental investigation, indemnification agreements can reduce the risk that corporate management will "serve up" directors and officers to avoid indictment of the corporation.

The payoff is significant for the shareholders of corporations that provide their directors and officers with robust personal indemnification agreements. All else being equal, well-qualified directors and officers will prefer to serve corporations that provide them with the best possible personal protection. Such protection enables them to put aside concerns of personal liability and focus on the job of increasing shareholder value.

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Of course indemnification is available to directors and officers from sources other than indemnification agreements. State corporate law allows a corporation to indemnify its directors and officers, and state labor law often provides protection for officers in their capacity as employees of the corporation. Corporations usually implement these protections by adopting bylaws that both promise indemnification to the "fullest extent permitted by law" and provide for the advancement of legal defense costs prior to the resolution of any litigation. Many directors and officers of corporations mistakenly believe that these bylaw provisions provide them with the maximum protection possible. After all, how could a corporation enter into a contract that is more expansive than the "fullest extent permitted by law"?

Misplaced trust in corporate bylaws

This logic is flawed, however. Although these other sources of protection are useful, none offers the level of certainty that a personal indemnification agreement can provide.

Directors and officers should not rely solely on corporate bylaws for two primary reasons:

* Corporate bylaws, unlike personal indemnification agreements, can be unilaterally amended by the corporation to the detriment of directors and officers.

* Only personal indemnification agreements provide an adequate level of process detail.

Bylaws can be amended. The corporate laws of most states allow the board of directors to amend a corporation's bylaws, even if the amendment diminishes protections previously afforded to and relied upon by a director or officer. A board can therefore unilaterally reduce the protections afforded by a corporation's bylaws, including with respect to indemnification or the advancement of legal fees. In particular, the board has this right under Delaware law, the applicable corporate law for the majority of corporations in the United States. In addition, most states, including Delaware, allow shareholders to amend bylaws without the consent of the board.

More than a theoretical risk, one of these scenarios played out in the Delaware Chancery Court case of Schoon v. Troy. In the...