Law reviews.

- For article, "2006 Amendments to Georgia's Corporate Code and Alternative Entity Statutes," see 12 Ga. St. B. J. 12 (2007). For article, "When Do State Laws Determine ERISA Plan Benefit Rights?," see 47 J. Marshall L. Rev. 145 (2014).

COMMENT

Source: Model Act, § 8.51. This replaces provisions found in former § 14-2-156.

The provisions on indemnification have undergone considerable revision, in response to recent concerns about excessive director liability. These concerns have raised legitimate concerns that qualified persons will refuse to serve on boards of Georgia corporations, and led to broad corporate authority to exculpate directors from liability in 1987, now contained in Section 14-2-202(b)(4) of the Code. The indemnification provisions have been revised to reflect the approach of the exculpatory provisions.

Subject to the procedural safeguards provided in Part 5, authorization for indemnification is made virtually coextensive with authorization for liability insurance. Section14-2-858 of the Code, drawn from the Model Act, and former § 14-2-156(g), permits liability insurance protection to extend as far as commercial insurance markets would extend. Commercial insurers are not in the business of writing insurance policies that encourage wrongful behavior, and thus have traditionally written exceptions for willful wrongdoing, active dishonesty, or illegal personal profit, including knowing violations of the securities laws. See generally Johnston, "Corporate Indemnification and Liability Insurance," 33 BUS. LAW. 1993 (1978) and Hinsey, "The New Lloyd's Policy Form for Directors and Officers Liability Insurance - An Analysis," 33 BUS. LAW. 1961 (1978). The purpose of the indemnification provisions is to permit indemnification to essentially the same extent, where it is properly approved.

Section 14-2-851 permits indemnification subject to the commonly provided limitations contained therein and in Section 14-2-855, without the necessity of shareholder approval, except as provided in Section 14-2-855(c)(4). The broader indemnification authority of Section 14-2-856, however, requires shareholder approval.

Subsection (a) is a self-implementing general grant of corporate power to indemnify directors. Its limits, a good faith regard for the corporation's interests, parallel the duties of Section14-2-830, with the exception of the standard of care. This preserves the approach of former Georgia law, § 14-2-156(a). The limits on that power are set out in subsections (d) and (e), and are subject to the procedural safeguards of Sections14-2-855 and14-2-856.

Subsection (b) makes clear that a director who is serving as a trustee or fiduciary for an employee benefit plan under ERISA meets the standard for indemnification under Section14-2-851(b) if he believes in good faith that his conduct was not opposed to the best interests of the participants in and beneficiaries of the plan. This follows Model Act § 14-2-851(b), except that the Model Act required a reasonable belief that his acts were in the interests of plan participants and beneficiaries. The "reasonably believed" language has been replaced with a "good faith" belief standard, consistent with the approach of Section14-2-830.

The purpose of subsection (c) is to reject the argument that indemnification is automatically improper whenever a proceeding has been terminated on a basis that does not exonerate the director claiming indemnification. Even though a final judgment or conviction is not automatically determinative of the issue whether the minimum standard of conduct was met, any judicial determination of substantive liability would in most instances be entitled to considerable weight. By the same token, it is clear that the termination of a proceeding by settlement or plea of nolo contendere should not of itself create a presumption either that conduct met or did not meet the standard of Section14-2-851. This follows the approach of former law, § 14-2-156(a). On the other hand, a final determination of nonliability or acquittal automatically entitles the director to indemnification of expenses under Section14-2-852.

Subsection (d) imposes limits on the authority of a corporation to indemnify a director under Section14-2-851. These provisions forbid indemnification under Section14-2-851 where the director is adjudged liable to the corporation, preserving the rule of former § 14-2-156(b) as to derivative actions. Subsection (d) also prohibits indemnification under Section 14-2-851 if the director was adjudged liable for an improper personal benefit, which was not found in former Georgia law. This parallels limits on exculpation found in Code Section14-2-202(b)(4)(iv).

Subsection (e) limits indemnification under Section14-2-851 in actions brought by the corporation, and in derivative actions, to expenses incurred in connection with the proceeding. This avoids circularity, since otherwise the director would be able to seek indemnification where the director had settled a claim brought by or for the corporation. This preserves the approach of former § 14-2-156(b). However, Section14-2-856 permits indemnification as to certain actions by the corporation or derivative actions, with shareholder approval.

Provisions added to former § 14-2-156(j) by § 3, Act 657, Ga. Laws 1987, to the effect that advance of expenses and indemnification granted shall inure to the benefit of heirs, executors and administrators are not repeated in the Code because "director" is defined in Section14-2-850 to include the estate of a deceased individual.

Note to 1996 Amendment Changes were made to conform to 1994 amendments to the Revised Model Business Corporation Act. See 49 Bus. Law. 741 (Feb. 1994) and 49 Bus. Law. 1823 (August, 1994). Readers are referred to the official comments to the Revised Model Business Corporation Act for more extensive discussions of the text of this section.

Subsection (a) has been substantially revised. Subsection (a)(1) distinguishes between conduct performed in a director's official capacity and that outside of such capacity.

Former subsection (e), limiting indemnification to reasonable expenses incurred in connection with a derivative proceeding, has been repealed, and its language moved to subsection (d)(1). But subsection (d)(1) authorizes such indemnification only if it is determined that the director has met the relevant standard of conduct under subsection (a). This eliminates the possibility that a director could be found liable for conduct that he did not believe was in the best interests of the corporation, and then obtain indemnification for those expenses.

Cross-References Advance of expenses, see § 14-2-853. Determination and authorization of indemnification, see § 14-2-855. Court-ordered indemnification, see § 14-2-854. Derivative proceedings, see § 14-2-740 et seq. Director standards of conduct, see §§ 14-2-830 and14-2-831. "Expenses" defined, see § 14-2-850. "Liability" defined, see § 14-2-850. Mandatory indemnification, see § 14-2-852. "Official capacity" defined, see § 14-2-850. "Proceeding" defined, see § 14-2-850. Report to shareholders on indemnification, see § 14-2-1621.

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