Some Observations On Indemnification Provisions In Articles Of Incorporation

Over the years, I’ve read many articles of incorporation that include provisions relating to indemnification of officers, directors and others.  Today’s post will cover a few questions and observations that have occurred to me over the years.  I’ll cover more of these “Why is there air?” type questions in future posts.

Vice Admiral James Stockdale Asked A Very Good Question: “Why Am I Here?”

The first question is the existential question – why do indemnification provisions exist in the articles at all?  I have an answer for California corporations.  Formerly, the provisions of Corporations Code Section 317 governing indemnification were exclusive.  However, the legislature in 1987 made Section 317 non-exclusive if additional indemnification is authorized by the articles of incorporation.  Cal. Corp. §§ 204(a)(11) and 317(g).  While it is debatable how much more indemnity this allows, these statutes at least explain why it might be desirable to include a provision regarding indemnification in the articles of a corporation organized under the California General Corporation Law.

Although A Corporation May Fly A Different Flag, California Law May Govern 

But why include an indemnification provision when the corporation isn’t incorporated in California?  One reason might be that the corporation is a pseudo-foreign corporation.  Section 2115 of the Corporations Code subjects these corporations to Section 317.  Thus, the failure to include a provision allowing “excess” indemnification may limit these power of these corporations to what is permitted by Section 317.

It’s Only Locked If It’s Been Bolted

Another reason to include an indemnification provision might be to “lock in” indemnification rights by placing them in a document that can only be changed by a shareholder vote. However, this makes sense only if the indemnification provisions are mandatory and I often see permissive provisions in the certificates of incorporation of exchange listed Delaware corporations.  What benefit is there in simply restating or paraphrasing Section 145 of the Delaware General Corporation Law? Also, I’m skeptical of the underlying premise that a provision that may be changed by vote the stockholders is more concrete than an individual contract with the director or officer.

The Study of Classics Is Insane

This weekend, UCLA’s Classics Department held it’s 4th Biennial Graduate Conference.  The topic this year was Mens Insana: Madness in the Ancient World.  I managed to make the keynote address by Brooke Holmes, Associate Professor of Classics, Princeton University.  Coincidentally, that same day I attended a wonderful lecture (not part of the Classics Department conference) by UCLA English Professor Robert Watson on Shakespeare, Tragedy and the 21st Century.  Shakespeare’s tragedies are every bit as crazy as those in the ancient world.

 

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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