Service as a corporate director or officer entails significant personal risk. If the corporation is involved in any kind of dispute or investigation, its directors and officers (D&O’s) can expect to be sued or, at least, involved as witnesses. These risks multiply if the corporation is or will be publicly traded. Compounding these risks, the U.S. Department of Justice recently issued guidelines to all federal prosecutors requiring that their investigations and prosecutions focus on the individuals who may be responsible for corporate misconduct, and conditioning any cooperation credit for the corporation on its providing evidence against the individuals. Even the most careful director or officer needs an indemnification agreement.
Indemnification agreements offer significant advantages over organizational documents. They are bilateral contracts that can be modified or terminated only with the consent of the indemnitee. In contrast, bylaw and charter provisions can be modified or terminated, respectively, by vote of the board of directors or shareholders. Also, many bylaw and charter provisions are outdated, vague or both. In contrast, indemnification agreements allow issues of D&O liability to be addressed with much greater flexibility, creativity and detail than organizational documents.
