Why You Should Require a Separate Indemnification Agreement

When forming a business as a corporation, you will have to select corporate directors and officers. You may even be one of these directors or officers. Officers and directors can face personal exposure when the corporation inevitably becomes involved in some sort of dispute. That is why it is extremely important that officers and directors require separate indemnification agreements between themselves and the corporation.

What Exactly is Indemnification?

Indemnification in this situation involves the corporation indemnifying the directors and officers. To indemnify is to guarantee financial reimbursement to an individual in case of a specified loss. Under California law, a corporation has the ability to indemnify its agents, directors, and officers. However, any indemnification of officers or directors for the defense of any proceeding must be done in a way that is consistent with that law in order to be valid. The law allows indemnification against expenses, judgments, fines, settlements and other amounts reasonably incurred in connection with the proceeding if the director or officer acted in good faith and reasonably thought he or she was acting in the best interests of the corporation and, in criminal matters, had no reason to believe the conduct was unlawful.

But What About Indemnification Agreements in the Organizational Documents?

The documents created and filed when a corporation is organized often include indemnification provisions. However, individual indemnification agreements better serve the officers and directors. Part of the reason these individual agreements are better is because they are more akin to a traditional contract. Unlike the corporate organizational documents, these individual agreements represent two-way bargaining for consideration.

Individual Agreements Can Provide Better Protection

Individual indemnification agreements can better protect officers and directors. The organization documents and the statutes they rely on are typically fairly general in nature, whereas individual agreements can become quite specific. They can be more precise about what sorts of proceedings are covered because they can take into account an individual director’s or officer’s true role in the corporation. These agreements can identify and define key terms, which in turn can expand protections for directors and officers if the terms are defined broadly and inclusively. Individual indemnification agreements can also create an opportunity to indemnify directors and officers in situations where the very basic indemnification provisions in formation documents do not apply. By expressly covering these situations that the general indemnification clauses do not cover, the directors and officers are better protected.

Indemnification Agreements Can Include Procedures and Deadlines

Individual indemnification agreements can utilize procedures and deadlines that strengthen the rights of directors and officers. These agreements can mandate when a corporation settles a claim against the director or officer that it include certain terms that are favorable to the director or officer. It can also set deadlines within which things like indemnification payments be made. Directors and officers can require that these agreements give them options when it comes to dispute resolution methods.