COMMENT

Source: Model Act, § 8.54.

Section 14-2-854 permits court-ordered indemnification in three situations: (1) a director entitled to mandatory indemnification may enforce that entitlement by judicial proceeding (in which case the court may also order the corporation to pay the reasonable expenses incurred in connection with the proceeding); (2) indemnification at the court's discretion is permitted in all cases whether or not the director met the requisite standard of conduct in Section 14-2-851 or is otherwise ineligible for indemnification; and (3) a director secures a court order for advancement of expenses. Indemnification with respect to derivative suits or improper benefit is limited to expenses by the last clause of Section 14-2-854(2), except that subsection (2) of the Model Act has been modified to permit court-ordered indemnification of amounts paid in a judgment if the shareholders have authorized such indemnification pursuant to Section 14-2-856. This has no counterpart in former Georgia law, but is designed to parallel the director exculpatory provisions of the Code.

Subsection (3) is new and has no counterpart in either the Model Act or former Georgia law. It permits a director to sue for expense advancement pursuant to charter, bylaw or other provision committing the corporation to advance expenses. This permits a director to enforce previously bargained for contract rights to expense advancement in the proceeding in which the expenses are being incurred.

Application for indemnification under Section 14-2-854 may be made either to the court in which the proceeding was heard or to another court of appropriate jurisdiction. For example, a defendant in a criminal action who has been convicted but believes that indemnification would be proper could apply either to the court which heard the criminal action or bring an action against the corporation in another court. A decision by the board of directors not to oppose the request for indemnification is governed by the general standards of conduct found in Section 14-2-830. Even if the corporation decided not to oppose the request, the court must satisfy itself that the person seeking indemnification is properly entitled to it.

A corporation may limit the right of a director under Section 14-2-854 by a provision in its articles of incorporation. In the absence of such a provision, however, the court has general power to grant indemnification under this section.

Note to 1996 Amendment Changes were made to conform to some of the 1994 Revised Model Business Corporation Act amendments. See 49 Bus. Law. 741 (Feb. 1994) and 49 Bus. Law. 1823 (Aug. 1994). Most changes were of form and not substance. Certain portions of the Model Act language were deleted as surplus cross references. Reference is made to the official Model Act comments for a more detailed explanation of this section.

Changes to the introductory clause of subsection (a) were largely stylistic, although the end of the clause was changed from permissive "may order indemnification" to mandatory "shall." Subsection (a)(1) formerly provided that the court may order indemnification if it determines that the director is entitled to mandatory indemnification. This has been eliminated as surplusage, in view of the statutory rights granted in Code Section 14-2-852. Former subsection (a)(2) authorized indemnification even where a director failed to meet the standard of conduct set forth in Code Section 14-2-851(a) or was adjudged liable in a derivative proceeding or for receipt of an improper personal benefit, if the court determined that the director was fairly and reasonably entitled to indemnification, although if a director was found liable in the latter two instances indemnification was limited to reasonable expenses incurred unless broader indemnification was authorized by the shareholders. This has been replaced by a much briefer reference to shareholder-authorized indemnification in new subsection (a)(1), while questions of judicial discretion are now covered in subsection (a)(2). Subsection (a)(2) is a more elaborate restatement of the court's power to order indemnification contained in former subsection (a)(2). As the Model Act comments state, there are no statutory outer limits on the court's power to order indemnification under section [14-2-854(a)(3)?] . In the case of settlement of derivative actions, the court may want to examine whether the corporation has joined the director in the application for indemnification or advance of expenses, in determining the fairness and reasonableness of such action.

Subsection (b) is a restatement of rules for awarding directors' expenses in proceedings brought to enforce indemnification rights, previously scattered through subsection (a).

Note to 2006 Amendment The changes to subsection (a)(1) of Code Section 14-2-854 clarify that the court need not determine a director's ultimate entitlement to indemnification before ordering advancement of expenses. Advancement of expenses may be enforced if the director meets the conditions set forth in Code Section 14-2-853.

The changes to subsection (b) of Code Section 14-2-854, which are based on the provisions of Section 8.54(b) of the Model Business Corporation Act, provide for a mandatory award of litigation expenses incurred by a director in successfully enforcing his or her rights to indemnification or advancement of expenses. Otherwise, the director will not receive the full benefit of the indemnification or advancement award, because it will be reduced by the additional expenses incurred in enforcing those rights. The remainder of the changes to subsection (b) were made for purposes of preserving the court's discretion to award litigation expenses when the court has awarded indemnification or advancement on a discretionary basis.

New subsection (c) of Code Section 18-2-854, which is patterned after Section 145(k) of the General Corporation Law of the State of Delaware, authorizes (but does not require) a court to summarily determine a corporation's obligation to advance expenses without the necessity of a jury trial. Such a proceeding would be comparable to proceedings authorized under Code Section 14-2-1604, which permit the court to "summarily order" inspection and copying of certain categories of records and to mandate "expedited" disposition of applications to inspect other categories of records.

Cross-References Articles of incorporation, see § 14-2-202 and Article 10, Part 1. "Expenses" defined, see § 14-2-850. Mandatory indemnification, see § 14-2-852. "Party" defined, see § 14-2-850. "Proceeding" defined, see § 14-2-850. Report to shareholders on indemnification, see § 14-2-1621. Voluntary indemnification, see § 14-2-851.

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