Law reviews.

- For article, "Corporate Governance in the Aftermath of the Insurance Crisis," see 39 Emory L.J. 1155 (1990). For review of 1996 corporation, partnership, and association legislation, see 13 Ga. St. U. L. Rev. 70.

COMMENT

Source: Model Act, § 8.50.

The definitions set forth in Section 14-2-850 apply to Part 5 and have no application elsewhere in the Code. Former law did not provide a set of definitions.

A special definition of "corporation" is included in Part 5 to make it clear that predecessor entities that have been absorbed in mergers or other transactions are included within the definition. The approach of this subsection is similar to that of former § 14-2-156(i), as amended in 1975, which expressly covered successor corporations in business combinations.

A special definition of "director" is included in Part 5 to make it clear that a person who is or was a director is covered by this part while serving at the corporation's request in another enterprise. The purpose of this definition is to give directors the benefits of the protection of this part while serving at the corporation's request in a responsible position in employee benefits plans, trade associations, nonprofit or charitable entities, foreign or domestic entities, and other kinds of profit or nonprofit ventures. This is consistent with former § 14-2-156(a). The only significant departure from former law is the addition of the second sentence of Section14-2-850(2), which makes clear that a director who is serving as a fiduciary of an employee benefit plan is nevertheless viewed as acting as a director for purposes of this part. Former Georgia law authorized indemnification of officers, agents and employees. The Code provides for such authorization in Section14-2-857.

The estate or personal representative of a director is entitled to the rights of indemnification possessed by the director himself. See the last sentence of Section 14-2-850(2). The phrase, "unless the context requires otherwise," was added to make clear that the estate or personal representative did not have the right to participate in directoral decisions whether to grant indemnification authorized in this part.

"Expenses" is defined to include counsel fees to avoid repeated references to such fees every time "expenses" appears throughout the part.

"Liability" is defined for convenience, to avoid repeated references to recoverable items throughout the part. Even though the definition of "liability" includes both expenses and amounts paid to satisfy or to settle substantive claims, indemnification against substantive claims is not allowed in several provisions in Part 5. For example, indemnification in suits brought by or in the name of the corporation is limited to actions other than those where the director is held liable for specified actions, and to cases where shareholder approval is obtained. See Sections 15-2-851(d) and 14-2-856.

The definition of "liability" permits the indemnification only of "reasonable expenses incurred." The intention is that any portion of expenses falling outside the perimeter of reasonableness should not be indemnified, and that, if necessary, an allocation of expenses should be made. By contrast, unlike former § 14-2-156(a), Section14-2-850(4) provides that amounts paid to settle or satisfy substantive claims are not subject to a reasonableness test. Since payment of these amounts is permissive, a special limitation of "reasonableness" for settlements is inappropriate. Further, it is undesirable to base the statutory test of power to indemnify on an affirmative finding that a settlement is reasonable. Indeed, the grant of authority to indemnify only those settlements that are "reasonable" would suggest an "all or nothing" approach inconsistent with the basic philosophy of indemnification of "reasonable" expenses.

"Penalties" and "fines" are expressly included within the definition of "liability" so that in appropriate cases these items may also be indemnified. See Section 14-2-851. The purpose of this definition is to cover every type of monetary obligation that may be imposed upon a director, including civil penalties (which have been authorized in a number of recent statutes), restitution, and obligations to give notice (which are proposed as part of the revision of the federal criminal code). This definition also expressly includes the levy of excise taxes under the Internal Revenue Code pursuant to ERISA within the definition of "fines."

The Model Act contained a definition of "official capacity" which was deleted from the Code. The Code rejects the distinction developed by the Model Act, between indemnification for acts taken in one's official capacity, which required, under Section 8.51 of the Model Act, that the person to be indemnified must have reasonably believed he was acting in the best interests of the corporation, while if the action in question was not taken in his "official capacity," he need only have reasonably believed that the conduct was not opposed to the best interests of the corporation. This distinction did not exist in former Georgia law, § 14-2-156.

The definition of "party" establishes the basic coverage of the part. The definition includes every individual "who was, is, or is threatened to be made a named defendant or respondent in a proceeding." A person who is only called as a witness is not a "party" within this definition, and as specifically provided in Section 14-2-859b), indemnification of this person is not limited by this part.

The broad definition of "proceeding" ensures that the benefits of this part will be available to directors in new and unexpected, as well as traditional, types of proceedings whether civil, criminal, administrative, or investigative. It also includes appeals in lawsuits and petitions to review administrative actions.

Note to 1996 Amendment These changes were made to conform to 1994 changes in the Revised Model Business Corporation Act, as were other changes in Part 5 of Article 8. See 49 Bus. Law. 741 (Feb. 1994) and 49 Bus. Law. 1823 (Aug. 1994). Readers are referred to the official comments to the Revised Model Business Corporation Act for more extensive discussion of the text of this section. While the definition of corporation in subsection (1) was abbreviated in the 1994 amendments to the Revised Model Business Corporation Act, the Georgia definition was not changed. Under Code Section 14-11-212, a corporation can convert into a limited liability company without a merger. This provides a good reason to retain the language eliminated in the Model Act. Changes to subsection (2) add references to officers as well as directors, which provides definitions for purposes of both the indemnification provisions dealing with directors as well as Code Section 14-2-857, which authorizes indemnification of officers. Other stylistic changes, which were made to conform to 1994 changes to the Revised Model Business Corporation Act, substitute "entity" for "enterprise" and relocate the word "foreign". "Entity" is a defined term in Code Section 14-2-140, while "enterprise" was not defined.

Subsection (3) is new. It provides a separate definition of "disinterested director" for purposes of this part.

Corresponding with Model Act changes, a new definition of "official capacity" was included in subsection (6), because the term determines which of the two alternative standards of conduct set forth in Code section 14-2-851(a)(1)(B) applies to civil proceedings.

Cross-References Act definitions, see § 14-2-140. Witness indemnification, see § 14-2-859.