COMMENT

Source: Model Act, § 8.58. This replaces provisions formerly appearing in § 14-2-156(f).

Subsection (a) provides that a provision treating the indemnification of directors by the corporation in articles of incorporation, bylaws, shareholders' or directors' resolution, or contract "is valid only if and to the extent it is consistent with" this part. Formerly § 14-2-156(f) provided that the statutory provisions were not "exclusive" and made no attempt to limit the nonstatutory creation of rights of indemnification. This kind of language is subject to misconstruction, however, since nonstatutory conceptions of public policy limit the power of a corporation to indemnify or to contract to indemnify directors, officers, employees, or agents.

The language of the first sentence of subsection (a), "to the extent it is consistent with this part," is believed to be a more accurate description of the limited validity of nonstatutory indemnification provisions than the "nonexclusive" provisions of earlier versions of the Model Act. It is important to recognize that "to the extent it is consistent with" is not synonymous with "exclusive." Situations may well develop from time to time in which indemnification is permissible under Section 14-2-859 but would be precluded if all portions of Part 5 were viewed as exclusive. But indemnification provisions protecting against the consequences of willful misconduct are not consistent with this Part and would not be valid. Furthermore, they would violate well-understood principles of public policy and doubtless would be invalidated on that ground even under statutes purporting to make "nonexclusive" the statutory provisions for indemnification. To the extent the consistency language may preclude indemnification in circumstances where it is reasonable and violates no statutory policy, an escape valve is provided in Section 14-2-855(2), which authorizes a court to grant indemnification if a director "is fairly and reasonably entitled to indemnification in view of all the relevant circumstances," even though he may not have fully met the standards of conduct set forth in Section 14-2-851.

Section 14-2-859 does not preclude provisions in articles of incorporation, bylaws, resolutions, or contracts designed to provide procedural machinery different from that provided by Section 14-2-855 or to make mandatory the permissive provisions of Part 5. For example, a corporation may properly obligate the board of directors to consider and act expeditiously on an application for indemnification or advances, or obligate the board of directors to cooperate in the procedural steps required to obtain a judicial determination under Section 14-2-854.

The consistency limitations of Section 14-2-859 of the Code have an impact different from the Model Act, because of the provisions of Section 14-2-856, which permit shareholders to approve indemnification without regard to the limitations of other provisions of Part 5, subject to the exceptions contained in Section 14-2-856.

The first sentence of subsection (a) applies only to directors; it does not apply to officers, employees, or agents who are not directors. See Section 14-2-857 and its Comment. The inherent problems of conflict of interest and the need to encourage persons to serve as directors are not present to the same degree in the case of nondirector officers, employees, or agents. The standard for permissible indemnification of these persons in Section 14-2-857(2) is "consistent with law" without regard to this part.

Subsection (b) is designed to make clear that Part 5 deals only with directors who are actual or prospective defendants or respondents in a proceeding, and that expenses incurred in connection with appearance as a witness may be indemnified without regard to the limitations of Part 5. Indeed, most of the standards described in Sections 14-2-851 and 14-2-854 by their own terms can have no meaningful application to a director whose only connection with a proceeding is that he has been called as a witness.

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). The Model Act's official comments should be read in interpreting this section.

Subsection (a) is new. Where former subsection (a) merely stated that provisions authorizing indemnification were valid and binding only to the extent consistent with this part, the revised language expressly authorizes such provisions. The second sentence of new subsection (a) adds a default provision not present in the former language, treating authorization of indemnification as including authorization of advance of expenses, unless otherwise provided.

Subsection (b) is new. It clarifies that a corporation's indemnification provisions do not automatically provide blanket protection for directors of corporations that are merged into the corporation. The right of such directors to indemnification will depend on their rights with respect to the constituent corporation of which they were directors. The reference to Code Section 14-2-1106(a)(3) is part of this clarification.

Subsection (c) is also new. Its principal effect is to preclude retroactive limitation or elimination of previously existing rights of indemnification for past actions. Changes in former subsection (b), now subsection (d), are stylistic. Subsection (e) replaces authorization of indemnification of agents and employees formerly found in section 14-2-857(2).

Note to 2006 Amendment New subsection (f) of Code Section 14-2-859 provides statutory rules of construction for "short form" mandatory indemnification provisions, which generally provide that the corporation shall indemnify its officers and directors to "the fullest extent permitted by law." Subsection (f)(1) relocates the language from the last sentence of subsection (a) of former Code Section 14-2-859. Subsection (f)(2) was added for purposes of removing any doubt regarding whether "fullest extent permitted by law" language effectively triggers the extra measures of indemnification available under Code Sections 14-2-856 (for directors) and 14-2-857 (for officers). Corporations who do not wish to extend those extra measures of indemnification can do so either by avoiding use of the "fullest extent" language or by expressly providing to the contrary.

Note to 2016 Amendment Subsection (f)(1) of Code Section 14-2-859 was amended to insert a cross reference to subsection (c) of Code Section 14-2-856 that was inadvertently omitted when subsection (f) was added to Code Section 14-2-859 in 2006.

Cross-References Advance for expenses, see § 14-2-853. Articles of incorporation, see § 14-2-202 and Article 10, Part 1. Bylaws, see § 14-2-206 and Article 10, Part 2. "Director" defined, see § 14-2-850. Indemnification generally, see § 14-2-851 et seq. "Party" defined, see § 14-2-850. "Proceeding" defined, see § 14-2-850.

RESEARCH REFERENCES

PART 6 C ONFLICTING INTEREST TRANSACTIONS

JUDICIAL DECISIONS

RESEARCH REFERENCES