COMMENT

Source: Model Act, § 8.55. This replaces provisions formerly found in § 14-2-156(d). It preserves the approach of former law.

Section 14-2-855 provides the method for determining whether a corporation should voluntarily indemnify directors under Section 14-2-851. In this section a distinction is made between a "determination" and an "authorization." A "determination" involves a decision whether under the circumstances the person seeking indemnification has met the requisite standard of conduct under Section 14-2-851 and is therefore eligible for indemnification. This decision may be made by the persons or groups described in Section 14-2-855(b). In addition, after a favorable "determination" is made, the corporation must "authorize" indemnification, unless it has previously obligated itself to provide the indemnification; this includes a review of the reasonableness of the expenses, the financial ability of the corporation to make the payment, and the judgment whether limited financial resources should be devoted to this or some other use by the corporation. Section 14-2-855(c) provides that "authorization" of indemnification may be made only by the board of directors, by a committee of the board, or by the shareholders. While special legal counsel may make the "determination" of eligibility for indemnification, he may not "authorize" the indemnification.

Section 14-2-855(b) establishes a procedure for selecting the person or persons who will make the determination of eligibility for indemnification. Even though directors who are parties to the proceeding may not participate in the decision determining eligibility for indemnification, they may, if necessary to permit valid action by the board of directors, participate in the decision establishing a committee of independent directors or selecting special legal counsel. Directors who are parties may also participate in the decision to "authorize" indemnification on the basis of a favorable "determination" if necessary to permit action by the board of directors. This limited participation of interested directors in the decision is justified by a principle of necessity.

Legal counsel authorized to make the required determination is referred to as "special legal counsel." In former § 14-2-156(d)(2), he was referred to as "independent" legal counsel. The word "special" is felt to be more descriptive of the role to be performed and is not intended to indicate that the counsel selected should not be independent in accordance with governing legal precepts. "Special legal counsel" should normally be counsel having no prior professional relationship with those seeking indemnification, should be retained for the specific occasion, and should not be either inside counsel or regular outside counsel. It is important that the selection process be sufficiently flexible to permit selection of counsel in light of the particular circumstances and so that unnecessary expense may be avoided. Hence the phrase "special legal counsel" is not defined in the statute. The description of the process by which counsel is selected is new to Georgia law.

Determinations by shareholders rather than by directors or special counsel are permitted by Section14-2-855(b)(4), but shares owned by or voted under the control of directors seeking indemnification may not be voted on the determination of eligibility for indemnification. This does not affect rules governing the determination of a quorum at the meeting. Formerly § 14-2-156(d)(3) merely referred to "affirmative vote of a majority of the shares entitled to vote thereon," without discussion of whether any shareholders were disqualified.

Note to 1996 Amendment Changes were made to conform to 1994 changes in the Revised Model Business Corporation Act. 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. Changes in subsection (a) were stylistic and not substantive. Former subsection (b)(1) and (2) were deleted entirely. New subsection (b)(1) differs primarily in limiting directors' decisions to indemnify to those where there are at least two disinterested directors. Formerly subsection (b)(2) required a committee of the board that made such a decision to consist of at least two disinterested directors, but new subsection (b)(1) extends this requirement to decisions by the board as well. Former subsection (b)(3) is now subsection (b)(2). The amendments allow the disinterested directors to select special legal counsel to make the determination of eligibility for indemnification, but expand this provision to allow interested directors to participate in the selection of counsel where there are not at least two disinterested directors. This is a rule of necessity, to allow indemnification where all or all but one of the directors are named as defendants in a proceeding.

Cross-References Advance for expenses, see § 14-2-853. Committees of the board, see § 14-2-825. "Party" defined, see § 14-2-850. "Proceeding" defined, see § 14-2-850. Quorum of directors, see § 14-2-824. Special meeting of shareholders, see § 14-2-702. Standard for indemnification, see § 14-2-851.

RESEARCH REFERENCES