Checklist for Indemnification Agreements

RECITALS

  • Parties
    • Name of Indemnitee
      • Status (director, officer, major stockholder, etc.); and
      • Company and state of incorporation.
  • Consideration for Agreement
    • Service on board?
    • Continuing employment?
    • Continuing service on board?
  • Reasons for Indemnification
    • Statutory protection and insurance may be inadequate?
    • Reasonableness of agreement, i.e., to promote the best interests of company and its stockholders?
    • Substantial increase in litigation risk?
    • Desire to attract and retain qualified persons?

BODY OF AGREEMENT

  • Terms
    • Who will be indemnified?
      • Directors (past, present, and future directors);
      • Officers;
      • Employees;
      • Agents; or
      • Any party:
        • by reason of the fact he/she is a director, officer, employee, or agent;
        • is the legal representative thereof; or
        • a fiduciary who is serving at the request of the corporation.
    • Service at what type of entity? E.g., another corporation, domestic or foreign, subsidiary, partnership, limited liability company, joint venture, trust, or nonprofit enterprise.
    • Service at the request of the corporation?
    • Include service with respect to employee benefit plans? Or is there a separate indemnification agreement therefor?
  • Proceedings
    • Indemnify against what? Party to any
      • Suit, action or proceeding by reason of the former or present status.
    • What type of proceeding?
      • Administrative;
      • Civil;
      • Criminal;
      • Investigative;
      • Legislative;
      • Pending or completed or both; or
      • Include a catchall — any other type of proceeding?
  • What Will Be Indemnified?
    • Fees and expenses?
      • Judgments and penalties?
      • Define to include attorneys’ fees?
      • Expenses reasonably and/or actually incurred?
      • Excise taxes (if employee benefit plan actions are indemnified)?
      • Expenses incurred when serving as a witness?
    • Settlement costs?
    • Standard
      • Good faith belief; and
      • In manner believed in or not opposed to best interests of corporation.
  • Mandatory Payment
    • When is payment of expenses mandatory?
    • Is success on the merits required?
    • Is procedural success (“on the merits or otherwise”) sufficient?
    • Must claimant be wholly successful?
      • Will partial success result in partial indemnification?
    • Does settlement constitute success?
    • Is recovery against, or payment of a judgment or settlement by, the company to be imputed to codefendant directors or officers for purposes of indemnification coverage?
  • Advancement
    • Will expenses be paid in advance? Promptly?
    • Require an undertaking to repay any advancements if:
      • it is ultimately determined that the person is not entitled to advancement;
      • it is ultimately determined that he/she has not met the relevant standard of conduct; or
      • indemnification is not otherwise permitted by applicable law.
    • Will claimant need to provide reasonable evidence of expenses in connection with proceeding?
    • Who must provide undertaking — directors only?
    • How formal must the undertaking be? In writing?
    • Permit advancement even if the person would not be liable for payment of expenses under the articles or statute?
    • Is the advancement made in conformity with the prohibition against personal loans to directors and officers under the provisions of the Sarbanes-Oxley Act of 2002?
  • Indemnification Procedure
    • Require notification by indemnitee of commencement of any proceeding?
    • What happens if indemnitee fails to notify the company?
      • Will omission relieve the company of liability only if company loses significant, substantive, or procedural rights with respect to the defense as a result of such omission?
    • Must the request for indemnification be in writing?
    • What types of materials, if any, is the director or officer required to submit with the request?
    • Is there a limitation on the amount of time the director or officer has to make a claim?
      • When does the time begin to run?
  • Standards
    • Is the indemnitee required to meet a standard of conduct for indemnification?
    • Is indemnitee conclusively presumed to have met the relevant standard and be absolutely entitled to indemnification unless there is a demonstration by clear and convincing evidence that indemnitee has not met the standard?
    • Who determines whether the standard is met?
      • Majority of quorum of disinterested directors?
      • Shareholders by vote?
      • Majority of quorum of stockholders who are not a party to the proceeding due to which a claim is made?
      • Independent legal counsel?
        • Only if quorum of disinterested directors is unavailable?
        • At request of quorum of disinterested directors?
        • Define independent legal counsel.
        • Who pays for independent legal counsel?
  • Exclusivity
    • Is indemnification exclusive of other rights under bylaws, agreement, or vote of stockholders or disinterested directors?
  • Repeal
    • Can indemnification be repealed? What about prior acts or omissions? Will they be indemnified against?
  • Third-Party Proceedings
    • When is indemnification prohibited?
      • Indemnitee judged to be liable in the performance of duties to the company unless the court determines indemnitee is fairly entitled to indemnification? Any action by or in the right of the corporation?
    • Require a determination that indemnification is permitted by applicable law?
    • Settlement
      • Require that any settlement be approved in advance by the company?
      • Indemnify against costs “actually and reasonably” incurred?
    • What is the effect of the termination of any action?
      • Define “termination”: by judgment, order, settlement, conviction, or plea of nolo contendere or its equivalent.
    • Does termination, of itself, create a presumption that indemnitee did not act in good faith? Or that:
      • indemnitee had reasonable belief action was not in or opposed to the best interests of the corporation;
      • indemnitee had reasonable cause to believe conduct was unlawful; or
      • otherwise adversely affects the rights of indemnitee?
  • Enforcing the Agreement
    • Include enforcement mechanism?
    • If so, provide:
      • A time limit in which claim is payable (30, 90, 120 days after receipt of claim by company); and
      • If unpaid, claimant may bring suit.
    • Must any judicial proceeding be de novo?
    • Define “burden of proof” (usually on company to prove that indemnification or advances are not appropriate).
    • Standard: clear and convincing evidence?
    • Effect of determination or failure (by board, independent legal counsel, or stockholders) to determine prior to suit that indemnification or advancement is proper because indemnitee has met the proper standard of conduct?
      • Determination or failure to determine is not a defense by indemnitee; and
      • Does not create presumption that indemnitee has met applicable standard of conduct.
    • Is claimant entitled to “fees on fees” (costs of bringing suit to obtain indemnification)?
    • Does this include appellate fees regardless of outcome of proceeding?
    • Will company stipulate that it is bound by the agreement and is precluded from making any assertion to the contrary?
    • Does the agreement address indemnification rights following a change in control of the company?
  • Limitations
  • What are the limitations on indemnification?
    • Proceedings brought voluntarily by indemnitee? Without prior board approval?
    • Expense of serving as a witness in cooperation with any party in connection with a threatened or commenced change in control unless board finds it appropriate?
    • Profits made in violation of Section 16(b) of the Securities Exchange Act?
    • Expenses with respect to any employee benefit or welfare plan, for which indemnitee is otherwise indemnified by the company?
    • If indemnitee’s conduct is finally adjudged to be (knowingly) fraudulent, (deliberately) dishonest, or (willful) misconduct?
    • Breach of the duty of loyalty?
    • Will indemnification be deducted from any payment made to indemnitee under a valid and collectible insurance policy (except for excess)?
    • Court determination that indemnification is unlawful.
  • Insurance
    • Will company be required to purchase D&O insurance?
    • Does state allow purchase of D&O insurance from a captive insurance company?
    • Does state law require registration of a D&O insurance policy with a regulatory agency?
  • Security for Claims
    • Is the company required to provide collateral or designate a fund for payment of any indemnification obligations?
    • What form must the collateral take?
      • Trust account;
      • Letter of credit;
      • Escrow account?
  • Miscellaneous
    • State Laws and Regulations
      • Do state laws and/or regulations have particular requirements for indemnification of directors and officers in the company’s particular business classification?
      • Does the state or a state regulatory agency require a copy of any indemnification agreement? Prior approval? Record keeping?
    • Cooperation
      • Does state law require cooperation by indemnitee as condition for advancement of expenses?
      • Is indemnitee required to cooperate with the company?
      • What does cooperation involve? Provision of information? Reasonable cooperation?
    • Insurers
      • Must the company notify insurers of any claim? Must it be prompt?
      • Is company responsible for taking action to allow the insurers to pay in line with the policy?
    • Company’s Role in Proceeding
      • Is the company entitled to participate in any proceeding?
      • Is the company entitled to assume the defense of a matter that it is indemnifying?
      • Can the company select counsel?
      • Must such counsel be approved by indemnitee?
      • What happens if indemnitee obtains counsel after company has obtained counsel?
        • Company not liable for payment if indemnitee chooses to do so at his expense; and
        • Company is liable if indemnitee has reasonably concluded that there is a conflict of interest.

 

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