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DE Court Provides Important Guidance on Indemnification of Directors and Officers
In our litigious society, individuals are understandably reluctant to serve as directors or officers of publicly traded corporations without certain safeguards to protect their personal assets. Moreover, absent such protections, individuals serving in such capacities may be risk-averse in terms of both making bold business decisions and fighting (rather than settling) spurious lawsuits. Recognizing this reality, Section 145 of the Delaware General Corporation Law (DGCL ' 145) provides rules of the road for corporations to indemnify and obtain insurance to shield their directors and officers from personal liability for acts taken in their official capacities.
Although director and officer indemnification is not a new concept, there is limited judicial precedent interpreting DGCL ' 145. Thus, the recent Delaware Court of Chancery decision in Hermelin v. K-V Pharmaceutical Company (Civil Action No. 6936-VCG (Del. Ch. Feb. 7, 2012)) is most welcome. The Hermelin court was asked to consider indemnity claims of a deposed CEO under an expansive indemnification agreement. The court not only provided helpful guidance on the “two boundaries for indemnification” and required elements of proof under DGCL ' 145, but also explained the “dearth” of guiding case law by warning that the costs of litigating indemnification claims generally outweigh the potential benefits to the litigants.
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