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1 Presenting a live 90-minute webinar with interactive Q&A D&O Indemnification Provisions in Governance Documents and Agreements Drafting Effective Indemnity and Advancement Agreements to Protect Directors and Officers From Personal Liability TUESDAY, JULY 10, pm Eastern 12pm Central 11am Mountain 10am Pacific Today s faculty features: Dan A. Bailey, Member, Bailey Cavalieri, Columbus, Ohio Amy L. Goodman, Partner, Gibson Dunn & Crutcher, Washington, D.C. John F. Grossbauer, Partner, Potter Anderson & Corroon, Wilmington, Del. The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions ed to registrants for additional information. If you have any questions, please contact Customer Service at ext. 10.

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5 D&O Indemnification Provisions in Governance Documents and Agreements Presentation to: Strafford Webinars and Publications July 10, 2012 Amy Goodman

6 <Presentation Title/Client Name> An Overview of D&O Protection The Three-Legged Stool of Protection Exculpation Indemnification/Advancement Insurance 6

7 <Presentation Title/Client Name> An Overview of D&O Protection cont d Exculpation Statutory right of a corporation to limit or eliminate personal monetary liability of directors to the corporation and its stockholders from claims resulting from directors breach of their fiduciary duty of care (Delaware General Corporations Law ( DGCL ) 102(b)(7)) Must be included in a corporation s certificate of incorporation Does not protect a director from claims relating to: Breaches of duty of loyalty Acts or omissions not in good faith or involving intentional misconduct or a knowing violation of law Does not protect officers 7

8 <Presentation Title/Client Name> An Overview of D&O Protection cont d Indemnification/Advancement Indemnification: Compensates directors and officers for losses arising out of conduct relating to their position with the corporation Under Delaware law, a corporation: Must indemnify directors and officers that are successful on the merits or otherwise May, but is not required to, provide mandatory or permissive indemnification to employees and agents Advancement: Provides directors and officers with legal fees and expenses in advance of final disposition of the proceeding Under Delaware law, a corporation may, but is not required to, provide mandatory or permissive advancement to any or all of its directors, officer, employees and agents D&O Insurance Policies Provides protection to directors and officers for claims that the corporation either cannot (legally or financially) indemnify or if indemnification is permissive, refuses to indemnify 8

9 A. Permissive v. Mandatory B. Protected Persons C. Outside Positions D. Covered Claims E. Standard of Conduct F. Indemnifiable Losses G. Defense Cost Advancement H. Non-Exclusivity Provision 9

10 <Presentation Title/Client Name> Drafting Considerations: Who Is Protected? Directors and Officers Indemnification and advancement provisions can provide mandatory and permissive coverage Mandatory coverage: subject to certain limitations, the corporation must advance expenses and/or indemnify losses Permissive coverage: the corporation may, in its discretion, decide whether to advance expenses and/or indemnify losses Delaware law requires that a corporation provide mandatory indemnification to a director or officer if he or she is successful on the merits or otherwise A corporation may, but is not required to, provide indemnification in other situations Directors must still meet the statutory standard of conduct by acting in good faith and in a manner the person reasonably believed to be in or not opposed to the best interests of the corporation For a criminal proceeding, the person must also have had no reasonably cause to believe the person s conduct was unlawful Advancement to directors and officers is permissive under Delaware law A corporation can provide mandatory, permissive or no advancement rights to directors and officers 10

11 <Presentation Title/Client Name> Drafting Considerations: Who Is Protected? Distinguishing Between Directors and Officers Historically, most corporations provided identical indemnification and advancement rights to directors and officers, although some exceptions existed Example: Notwithstanding the foregoing no advance shall be made by the corporation to an officer of the corporation in any action, suit or proceeding if a determination is reasonably and promptly made (i) by the board of directors or (ii) by independent legal counsel in a written opinion that such person acted in bad faith or in a manner that such person did not believe to be in or not opposed to the best interests of the corporation. Post-Enron, commentators and some corporations have begun to consider distinguishing between the rights afforded to directors and to officers, particularly with regard to advancement Broad advancement rights can result in a company continuing to advance legal expenses even after it is clear that an individual engaged in misconduct However, unlike directors, officers are not protected by the business judgment rule and thus, may have a greater need for protection 11

12 <Presentation Title/Client Name> Drafting Considerations: Who Is Protected? Directors and Officers as Plaintiffs Broadly drafted provisions could require indemnification and advancement to a director or officer who is personally suing the corporation Delaware courts will require indemnification or advancement if the court views the suit as furthering the plaintiff s duties to the company A corporation can limit its exposure by providing that indemnification and advancement are not available for proceedings initiated by the director or officer other than: Proceedings to enforce the terms of indemnification provisions themselves; Mandatory counterclaims that must be made or waived by a defendant; and Proceedings authorized by the board of directors 12

13 <Presentation Title/Client Name> Drafting Considerations: Who Is Protected? Employees and Agents Indemnification and advancement for employees and agents is permissive under Delaware law A corporation can: Grant mandatory advancement and/or indemnification to employees and agents; Grant permissive advancement and/or indemnification at the corporation s discretion to employees and agents; or Be silent on advancement and/or indemnification to employees and agents Indemnifying employees and agents can help attract quality individuals but can also result in substantial potential liability for a corporation Historically, some companies provided mandatory indemnification and advancement to all employees and agents Modern practice is to grant only permissive indemnification and advancement to employees and agents 13

14 D&O Indemnification Provisions in Governance Documents and Agreements John F. Grossbauer, Esq. Strafford Webinar and Publications July 10, 2012

15 Scope of Protection Under Delaware Law Section 145 of the Delaware General Corporation Law provides the framework for analysis. Case law makes clear that, while bylaws and agreement may vary the process by which indemnification and advancement is provided, the substance of what may be covered by indemnification and advancement is limited by the public policy expressed in Section 145 (a) through (e).

16 Who may be covered? Issues of coverage frequently arise in companies with multiple tiers of subsidiaries. Case law only clearly provides that directors of first-tier subsidiaries are serving at the request of the parent as a matter of law. Issues may also involve as to how to characterize a person whose function does not neatly fit into the categories defined in the statute (e.g., a manager of an LLC or a benefits plan administrator).

17 What kinds of claims may be covered? For third party claims, Section 145 (a) permits indemnification of any person made a party or threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative. For direct or derivative claims, Section 145 (b) permits indemnification of any person who is a party or is threatened to be made a party to a threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor.

18 What kinds of claims may be covered? (cont d) Interpretive issues typically center on whether a proceeding has been threatened or whether a person has been threatened to be made a party to a proceeding so as to trigger obligation to indemnify and advance. Witness expenses? Claim must be by reason of the fact that the indemnitee was or is a director, officer, employee or agent.

19 What kinds of loss may be covered? For third party claims, company may indemnify for expenses as well as judgments, fines and amounts paid in settlement. For direct or derivative claims, may only cover expenses, and expense reimbursement requires Court of Chancery approval if the indemnitee has been adjudged liable to the corporation. Must meet the standard of conduct: an indemnitee must have acted good faith and in a manner the person reasonably believed to be in or not opposed to the best interests of the corporation. For criminal matters, the person must have had no reasonable cause to believe the person s conduct was unlawful. There is very little law on this standard.

20 A. Fees on Fees ( successful in whole or in part ) B. Burden of Proof on Company C. De Novo Court Review (no presumption) D. Requested Subsidiary Service E. Prohibit Retroactive Amendments F. Outside Position Requests 20

21 How should coverage be provided? Options include certificate of incorporation provisions, bylaws and indemnification agreements. Certificate of Incorporation is least flexible. It requires stockholder approval for adoption and any amendments. Bylaws are easily adopted and amended by the Board of Directors. However, they are not individualized, and are subject to change without the consent of the covered parties. Delaware Section 145 (f) was amended to eliminate the risk that amendments narrowing coverage could be applied retroactively.

22 How should coverage be provided? (cont d) Indemnification Agreements can be drafted to cover indemnification as well as insurance. They may be drafted in a manner that provides procedural protection such as standards of proof and remedies to affected parties. They also may not be amended without the consent of each indemnitee. The peace of mind benefit to indemnitees who are provided individual contracts comes at the cost of lack of flexibility for the corporation. There also may be a number of different forms applicable to present and former directors and officers that will need to be considered.

23 How should coverage be provided? (cont d) Companies should consider the package provided to indemnitees certificate, bylaws, agreement, insurance and ensure they work together and do not subject the company to inconsistent obligations.

24 A. Types of D&O Insurance Coverages B. Presumptive Indemnification C. Non-Indemnifiable Losses (Side A Coverage) D. Benefits of Side A Policy 24

25 To reach us Dan A. Bailey Amy Goodman John F. Grossbauer Direct dial: (302)