Indemnification and Insurance | Holger Spamann | January 28, 2016

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Indemnification and Insurance

Disney and Stone made it quite clear that the risk of liability for unconflicted directors is now modest at best even under the default rules: the business judgment rule provides robust protection to directors (and arguably officers). If the corporation’s charter has a 102(b)(7) waiver, as most do, the risk of liability for directors (but not officers) is even less. And under Aronson and the demand requirement, very few shareholders suits will advance to discovery if brought derivatively.

Nevertheless, directors and officers still face residual risk, in particular from litigation costs. Moreover, directors and officers may be the target of third-party litigation in relation to their corporate office: For example, the directors might be the target of an SEC enforcement action or an employee lawsuit as a result of their board service, whether or not such actions have a legally sound basis. For this reason, directors and officers should and do require that corporations indemnify and insure them extensively, even in advance of the final disposition of proceedings, which can take years (and generate hefty expenses in the interim). Please (re-)read Article VI of the model charter, and the law firm advice to prospective directors at perma.cc/4QGU-M4FL. Under DGCL 145, corporations are allowed (subsections a-b, e-f) and sometimes required (subsection c) to provide such indemnification and insurance. As a result, outside directors virtually never have to pay anything out of their own pockets in corporate lawsuits, see Black, Cheffins, & Klausner, Outside Director Liability, 58 Stan. L. Rev. 1055 (2006).

Please answer the following questions:

1. Which liabilities and expenses are indemnifiable under DGCL 145? Which are insurable?
2. What does your answer to the preceding question imply for directors' and officers' incentives to settle a derivative action?
3. Why do directors and officers insist on insurance, i.e., why are they still worried in spite of the business judgment rule, 102(b)(7) waivers, and generous indemnification promises?
4. What is the point of liability, if any, if all of the foregoing neutralizes it?
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February 07, 2018

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