In my last article I reviewed how directors, officers and employees may receive an advancement of their attorney fees prior to judgment when they are brought in to a proceeding based on actions taken in their official capacities for the company. However, the ultimate authority to indemnify, allowing the person to keep their advancement and further obtain from the company payment for any judgment or settlement, is governed by the indemnification statutes in Arizona. If litigation is settled or goes to trial, indemnification requires that the company pay the judgment or settlement, including expenses, again providing the company’s financial support for actions taken on behalf of the company if certain conditions are met.

Authority to Indemnify

A company may indemnify a director or officer, made a party to a proceeding if the individual’s conduct was in good faith and, the individual reasonably believed that while acting in their official capacity the conduct was in the company’s best interest or in all other cases the conduct was at least not opposed to the company’s best interest. In criminal proceedings, if the individual had no reasonable cause to believe their conduct was unlawful they may obtain indemnification. A second basis allowing such permissive indemnification is if the director or officer engaged in conduct for which broader indemnification allowances exist in the Articles of Incorporation.

Permissive indemnification is not available when a director or officer receives a financial benefit to which the person is not entitled, intentionally inflicts harm on the corporation or shareholders, intentionally violates criminal law, or unlawfully makes a distribution of company funds. In addition, the company may indemnify after the termination of a proceeding resolved by judgment, order, settlement or conviction if it is not itself determinative of whether the director met the good faith, best interest standard of conduct.

Required Indemnification

The company is required to indemnify a director or officer who was a prevailing party in the defense of any proceeding to which a person was a party in their official capacity for the reasonable expenses incurred by another person in connection with that proceeding. If a director was not an officer, employee or stockholder holding more than 5%, who then qualifies as an outside director, they are entitled to receive mandatory indemnification. But an outside director shall not receive indemnification if the director did not meet the standard of good faith and acting in the best interests or not opposed to the best interests of the company as described above.