TITLE 14 CORPORATIONS, PARTNERSHIPS, AND ASSOCIATIONS

Section 2. Business Corporations, 14-2-101 through 14-2-1703.

ARTICLE 8 DIRECTORS AND OFFICERS

14-2-856. Shareholder approved indemnification.

If authorized by the articles of incorporation or a bylaw, contract, or resolution approved or ratified by the shareholders by a majority of the votes entitled to be cast, a corporation may indemnify or obligate itself to indemnify a director made a party to a proceeding including a proceeding brought by or in the right of the corporation, without regard to the limitations in other Code sections of this part, but shares owned or voted under the control of a director who at the time does not qualify as a disinterested director with respect to any existing or threatened proceeding that would be covered by the authorization may not be voted on the authorization.
The corporation shall not indemnify a director under this Code section for any liability incurred in a proceeding in which the director is adjudged liable to the corporation or is subjected to injunctive relief in favor of the corporation:
1. For any appropriation, in violation of the director's duties, of any business opportunity of the corporation;
2. For acts or omissions which involve intentional misconduct or a knowing violation of law;
3. For the types of liability set forth in Code Section 14-2-832; or
4. For any transaction from which he or she received an improper personal benefit.
Where approved or authorized in the manner described in subsection (a) of this Code section, a corporation may advance or reimburse expenses incurred in advance of final disposition of the proceeding only if:
1. The director furnishes the corporation a written affirmation of his or her good faith belief that his or her conduct does not constitute behavior of the kind described in subsection (b) of this Code section; and
2. The director furnishes the corporation a written undertaking, executed personally or on his or her behalf, to repay any advances if it is ultimately determined that the director is not entitled to indemnification under this Code section.

(Code 1981, §14-2-856, enacted by Ga. L. 1988, p. 1070, § 1; Ga. L. 1989, p. 946, § 36; Ga. L. 1996, p. 1203, § 5; Ga. L. 1997, p. 143, § 14.)

COMMENT

Source: Former § 14-2-156(f), as amended, Laws 1987, p. 49, § 2, provided generally that the indemnification and advancement of expenses was "not deemed exclusive," and provided for further indemnification upon shareholder vote, except for the types of liabilities against which an officer or director could not be exculpated by a charter provision authorized by the predecessor of Code Section14-2-202(b)(4). Section14-2-856 preserves that approach. There is no counterpart in the Model Act. It also preserves the strict voting rule of former law (majority of all votes entitled to be cast, rather than majority of all shares entitled to vote), but does not contain specific notice requirements. Rather, it relies on the general notice requirements of Code Section14-2-705, which require notice of purposes for which special meetings are called, but do not require notice of purposes for annual meetings.

Section 14-2-856 is an entirely separate grant of corporate authority to indemnify, without regard to limitations contained in other sections of the Code. This authority may only be exercised by the shareholders, and then only under the types of voting rules generally reserved for decisions such as amending the articles of incorporation and other major corporate actions.

Under Section 14-2-856 the corporation may indemnify directors fully, including the amount of judgments and fines, as well as for expenses. This authority extends to actions by the corporation and derivative actions, as well as to actions brought by third parties or government officials. The justification for this is the parallel power of the shareholders to exculpate directors from liability to the corporation or its shareholders for negligent acts, subject to the public policy limits imposed by Section 14-2-202(b)(4). Where shareholders have not exculpated directors in advance by formally amending their articles, this section grants them power to indemnify directors, either by contract, bylaw or resolution approved in advance or after the fact. The reference to "ratified" is intended to cover the situation where a board of directors has authorized such indemnification, either in a bylaw, resolution or contract with the director, but the shareholders did not approve their action until a later time.

Note to 1989 Amendment Section 14-2-856 was amended to incorporate restrictions on advancement of expenses pursuant to shareholder-approved indemnification arrangements similar to the restrictions imposed by Code Section 14-2-853, but without reference to the standards of Code Section 14-2-851, which are inapplicable to shareholder-approved payments. Subsection (c), which is entirely new, addresses this question. The affirmation that must be provided by a director need not state that he believes he has met the standards of Code Section 14-2-851, but only that he has not behaved in a manner that would make him ineligible for shareholder-approved indemnification would be prohibited.

Note to 1996 Amendment This section was amended to reflect certain of the 1994 changes in sections 2.02(b)(5) and 8.58 of the Revised Model Business Corporation Act. See 49 Bus. Law. 741 (Feb. 1994) and 49 Bus. Law. 1823 (Aug. 1994). Because Georgia's authorization of shareholder approval of indemnification beyond that permitted to the directors antedates the Model Act's addition of this concept, Georgia's numbering system was retained. The first sentence of subsection (a) does not follow the Model Act pattern, which only authorizes shareholders to authorize indemnification in advance of the act or omission giving rise to the claim for advances or indemnification. The first sentence of subsection (a) is more general than the Model Act, and omits any reference to authorization "in advance." The second sentence of subsection (a) is new, and is intended to avoid the drafting oversight of authorizing indemnification without specifically addressing the question of advance of funds to directors.

Cross-References Exculpation of directors, see § 14-2-202(b)(4). Limits on indemnification authorized by directors, see § 14-2-851.

JUDICIAL DECISIONS

Advancement of expenses.

- 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

Am. Jur. 2d.

- 18B Am. Jur. 2d, Corporations, § 1628.

ALR.

- Reimbursement of stockholder or officer of corporation for expenses incurred with transaction conducted in his name but for benefit of corporation, 56 A.L.R. 973.

Attorneys' fees and other expenses incident to controversy respecting internal affairs of corporation as charge against the corporation, 39 A.L.R.2d 580.

Insurance: construction of policy or bond indemnifying directors or officers of corporation for expenses incurred in defending actions brought against them in their capacity as such, 49 A.L.R.3d 1250.

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