Also known as: indemnification and advancement of expenses · indemnification · advancement of expenses · D&O indemnification · advancement
Written by attorneys · grounded in primary & secondary sources — see below
A statutory right or contractual obligation allowing a corporation to reimburse directors and officers for liabilities and expenses incurred in proceedings arising from their official service. Reimbursement is available only after a determination that the individual met the applicable standard of conduct and is subject to authorization procedures or court order when the corporation disputes eligibility.
After her mother's intestate death, India Inoue received a $40,000 cash gift two years earlier. The estate personal representative refused to treat the transfer as an advancement because no contemporaneous writing existed. India petitioned the probate court for an order requiring the estate to indemnify her defense costs in the advancement dispute.
Insight Consulting served as trustee of a charitable trust created to promote community health programs. When litigation challenged the trust's purpose, the trustee applied to the court for an advance of legal expenses under the trust instrument's indemnification clause.
Select any source to read its text and confirm it supports the definition.
Ike Ingram received a $75,000 parcel of land from his father. The father's contemporaneous letter stated the transfer would be taken into account in any future intestate distribution. After the father's death, Ike demanded that the estate indemnify his costs in defending the advancement claim.
Ivy Ibarra, a director of Interlink Communications, was sued for alleged breach of fiduciary duty. The board refused to authorize payment of her defense costs. Ivy applied to the court under the corporation's articles for an order compelling the company to advance her expenses.
Israel Irving, an officer of Indigo Textiles, faced a shareholder derivative suit. After the board made the required determination that he had acted in good faith, the company advanced his legal fees pursuant to a bylaw provision obligating indemnification to the fullest extent permitted by law.
Ilana Isaacs, a director of Inertia Dynamics, incurred substantial litigation costs defending a claim arising from her board service. The corporation's articles contained an obligatory indemnification provision. When the board later attempted to rescind the advance, Ilana sued to enforce the pre-existing right.
A corporation may refuse an advance unless the articles, bylaws, or a board resolution create an obligatory right. Even then, the director must satisfy the statutory standard of conduct, and the corporation may condition the advance on an undertaking to repay if the director is ultimately found ineligible.
Supporting sources
No. A right to indemnification or advances created by statute or bylaw in effect at the time of the act or omission generally survives subsequent amendments unless the creating provision expressly permits elimination after the act occurred.
The corporation must make a specific determination, after the proceeding, that the director met the relevant standard of conduct set forth in the statute. Without that determination, indemnification is not authorized even if the articles permit it.
…See generally Ruder, Multiple Defendants in Securities Law Fraud Cases: Aiding and Abetting, Conspiracy, In Pari Delicto , Indemnification and Contribution, 120 U. Pa. L. Rev. 597, 620-645 (1972). [^maj-8]: See n. 1, supra . [^maj-9]: The court concluded that the duty of inquiry imposed on Ernst & Ernst under § 17 (a) was…