Are Charter Indemnification Provisions Contracts?

Public companies typically include provisions in their articles and bylaws that mandate indemnification of directors and officers. Often, these provisions include a statement to the effect that the rights to indemnification are a contract right. However, declaring that a contract exists does not necessarily establish a contract. Fortunately, the California Civil Code provides some rules for answering the question of whether charter provisions constitute a contract.

Article and Bylaw provisions mandating indemnification would appear to meet the definition of a contract under California law, i.e., ”an agreement to do or not to do a certain thing”. Cal. Civ. Code § 1549. In this case, the “thing” being agreed to is to provide indemnification. Section 1549 defines what a contract is, but it doesn’t explain how it is birthed. Pursuant to Civil Code Section 1550, a contract does not exist without all of the following:

  • Parties capable of contracting;
  • Their consent;
  • A lawful object; and
  • A sufficient cause or consideration.
Unless the officer is a minor, of unsound mind or deprived of her civil rights, capacity should not be an issue with corporate charters. Cal. Civ. Code § 1556.
I also don’t expect that there will be much issue regarding consent (provided the indemnitee is informed of the provision). Cal. Civ. Code § 1565. Because Corporations Code Section 317 explicitly authorizes indemnification, lawfulness does not appear to be an issue. See Is An Immoral Contract Unlawful? Finally, the indemnitee’s agreement to serve as a director or officer would seem to fulfill the requirement of consideration. Cal. Civ. Code § 1605.

But what about the statute of frauds? The California Civil Code generally requires that contracts of suretyship be in writing and signed. Cal. Civ. Code § 2793. Articles and Bylaws are in written. Thus, the only remaining issue is whether they are signed. The California Corporations Code requires that articles be signed. Cal. Corp. Code § 200. Bylaws are not usually signed, but they are often certified by the corporate secretary.

 

Topics:  Articles of Incorporation, Bylaws, Directors, Indemnification Clauses, Officers

Published In: Business Organization Updates, General Business Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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