Discuss whether a corporation may indemnify a director, officer or employee for the cost of defending and/or settling a lawsuit or criminal charge brought against the director, officer or employee.

Question

What will be an ideal response?

Answer 1

The cost of defending and/or settling a suit or criminal charge brought against a director, officer, or employee may be very high. To encourage people to become officers and directors, corporations often indemnify them for such expenses. Today, however, all of the states place some limitations on the ability of corporations to indemnify officers and directors in order to strengthen the deterrence element of tort and criminal law. In all instances, indemnification is mandatory if the officer or director prevails on the merits of the suit against him. When that occurs, the corporation must reimburse him for all of his costs and expenses. In cases in which the officer or director is found guilty, he still may be indemnified under voluntary indemnification if he acted in a manner that he believed not to be opposed to the corporation's best interests and had no reasonable cause to believe his conduct was unlawful. Such optional indemnification will occur if a majority of disinterested directors, an independent legal counsel, or the shareholders decide it to be appropriate. Many times, directors and corporations will have agreed in advance that indemnification should be mandatory under such circumstances. Such agreements are permissible and provide greater certainty and security for officers and directors.