The Delaware state legislature has updated the Delaware General Corporation Law for 2009 to provide additional indemnity protection for directors. Delaware corporation law is important to businesses throughout North America because the Delaware Court of Chancery (a special business court) and the Delaware Supreme Court are the source of most common law on corporations, and the legislatures and courts throughout the United States and many countries throughout the Caribbean and some Latin American countries look to Delaware court decisions for guidance. Additionally, a great many companies and other forms of business entity throughout the United States are formed in Delaware, and subject to Delaware law.
Effective August 1, 2009 Section 145(f) of the Delaware General Corporation Law is amended to provide that indemnification of directors, and their right to advancement of expenses for indemnity, may not be eliminated by the company after the occurrence of the act or omission giving rise to the indemnification claim, unless the by-law or charter provision providing indemnification allows for retroactive elimination. To simplify, unless the articles or by-laws provide, a company cannot refuse to indemnify an officer or director after an act or omission occurs, if the company documents provided for indemnity when the act was committed. This amendment legislatively overturns a 2008 Delaware Chancery Court decision in Schoon v. Troy Corp., 948 A.2d 1157, where a former director who was sued for breach of fiduciary duty sought advancement of defense expenses, but before the suit was brought, the company amended the bylaws to eliminate indemnification for former directors. The court upheld the company’s action.
The Colorado Business Corporations Act, C.R.S. § 7-109-103, requires Colorado corporations to indemnify their directors and officers unless the Articles of Incorporation specifically provide that no indemnification is to be provided. If the holding of Schoon v. Troy was applied in Colorado, a company would be able to amend its articles to retroactively eliminate the company’s indemnification obligation.
I recommend that directors and officers enter into indemnification agreements with the company. Articles of incorporation and bylaws can be amended, but a contract between two parties can normally not be amended without the consent of both parties.