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- For annual survey article discussing advancement of directors' expenses, see 46 Mercer L. Rev. 71 (1994).

COMMENT

Source: Model Act, § 8.53.

Section14-2-853 establishes a workable standard for advancement of expenses to directors facing protracted and costly litigation as a result of their service to the corporation: indemnification is permitted when the director assures the corporation of his belief that he has met applicable standards of conduct and promises to repay funds advanced if he ultimately is not entitled to indemnification. This conforms closely to former § 14-2-156(e), and rejects the Model Act requirement of a determination by the board or other decision-making authority that the director is entitled to advances of expenses because the facts then known would not preclude ultimate indemnification. Because all of the board are frequently named defendants, such a determination would involve a conflict of interests, and implementation of the costly procedures of Section14-2-855 to obtain an authorization. Elimination of these procedural requirements is intended to leave these questions to the general conflict of interest rules of Part 6. Thus authorization of advances may be subject to attack on the ground of unfairness to the corporation unless the director's affirmation meets the standards of required disclosure of Section14-2-860(4), and the advance is approved by disinterested directors in compliance with Section14-2-862, or by qualified shareholders in compliance with Section14-2-863. Alternatively, directors may choose to utilize the procedures of Section14-2-855.

Elimination of the Model Act's requirement of a "determination" of eligibility for advancement of expenses means that the board need only "authorize" the advance. This authority is limited by subsection (a) to reasonable expenses, and the determination of reasonableness is a business judgment to be made by or under general guidelines dictated by the board of directors. It is not required that the board review individual applications for advances once authorized for a proceeding, if the board has provided standards or procedures for reviewing the reasonableness of these expenses.

Subsection (a) requires a written affirmation by the director of his good faith belief that he has met the standard of conduct necessary for indemnification by the corporation and a written undertaking by or on behalf of the director to repay the advance if it is ultimately determined that he has not met the standard of conduct. The additional requirement of a written affirmation that the standard has been met is the only significant change from former law under § 14-2-156(e). Under subsection (b) the undertaking need not be secured and financial ability to repay is not a prerequisite. The theory underlying this subsection is that, in advancing expenses, wealthy directors should not be favored over directors whose financial resources are modest.

Subsection (c) of the Model Act, which required authorization of advances and payments to be made in accordance with Section 14-2-855, has been eliminated in the Code, for the reasons stated.

A director can also seek advances for expenses pursuant to any arrangements approved by shareholders under Section 14-2-856, which is separate authority from that contained in Section 14-2-853.

Note to 1996 Amendment Changes were made to conform to the 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. Changes in subsection (a)(1) expand the cases in which advance of funds is permitted by adding the phrase "or that the proceeding involves conduct for which liability has been eliminated under a provision of the articles of incorporation as authorized by Code Section 14-2-202(b)(4)." Changes in subsection (a)(2) are primarily stylistic. Model Act references to the various sections under which indemnification is permitted were excluded as redundant. Changes to subsection (b) are minor and stylistic. Subsection (c) is new, and specifies the procedures for approval of indemnification. While subsection (c)(1)(A) resembles procedures for directors' conflicting interest transactions under section 14-2-862, subsection (c)(1)(B) departs from that model by allowing all the directors to participate where there are not two disinterested directors. This is a rule of necessity, to prevent board paralysis on advance of funds pending a final decision. Because the director is obligated to repay the funds if not ultimately entitled to indemnification, there is little risk to the corporation from this more relaxed procedure. As the official comments to the Revised Model Act point out, this procedure is only available when a decision under subsection (c)(1)(A) is not possible because there are not two disinterested directors. Subsection (c)(2) adds to the Model Act language an exception for interested shareholder voting in the case of properly adopted contractual obligations.

Cross-References Determination and authorization of indemnification, see § 14-2-855. "Expenses" defined, see § 14-2-850. "Proceeding" defined, see § 14-2-850. Report to shareholders on indemnification, see § 14-2-1621. Standard for indemnification, see § 14-2-851.

JUDICIAL DECISIONS

Compliance with O.C.G.A. § 14-2-853 is sufficient to warrant advancement of expenses without the necessity of satisfying any other statutory preconditions. This is consistent with the expense advancement provision in O.C.G.A. § 14-2-856, which enables a corporation, from its inception by the inclusion of a provision in its articles of incorporation, to preapprove the advancement of expenses upon a director's compliance with the requirements in O.C.G.A. § 14-2-856(c). Service Corp. Int'l v. H.M. Patterson & Son, 263 Ga. 412, 434 S.E.2d 455 (1993).

RESEARCH REFERENCES