Using directors’ indemnity agreements for Delaware corporations

June 17, 2014

5273Delaware is a popular forum for organization and operation of publicly-traded corporations and is also the state of incorporation often chosen for companies looking to secure venture capital financing even though they are operating from another state.  One reason that Delaware is so popular is the extensive statutory and case law in that jurisdiction regarding indemnification of directors and officers and a client formed and organized as a Delaware corporation will generally seek guidance on drafting a directors’ indemnity agreement that sets forth the terms and conditions upon which the corporation will indemnify the director against certain claims made against the director as a result of serving as a director. See Specialty Form at § 9:226.

Such an agreement should include provisions that make clear the circumstances under which the corporation will indemnify and hold the director harmless from any claims attributable to the director’s alleged misconduct, and the procedures which the director must follow in order to assert a claim for indemnification. The drafter should consult the current version of the Delaware statutory provisions establishing the rules and procedures for indemnification of directors, officers, employees, and other agents of a corporation.

In some cases an indemnification agreement of this type will not be entered into unless and until the corporation reaches the point where it is reasonably anticipated that it will become a publicly-traded corporation and that the directors will be exposed to the additional risks of claims asserted under the federal Securities Act of 1933, Securities Exchange Act of 1934, Sarbanes-Oxley Act of 2002 or Section 954 of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

While authority for such agreements may be specified in the corporation’s charter documents, it is prudent to seek and obtain the explicit consent of stockholders given that claims that may be subject to such an agreement are often brought by stockholders concerned that directors and/or officers violated their fiduciary duties to the corporation and/or its stockholders.  For a sample of a stockholders’ written action approving a directors’ and officers’ indemnity agreement, see § 9:227.50.