Indemnity in proceedings by or in the right of the company: Overview, definition, and example
What is indemnity in proceedings by or in the right of the company?
Indemnity in proceedings by or in the right of the company refers to a provision where the company agrees to indemnify (i.e., compensate for losses or expenses) directors, officers, or employees who are involved in legal proceedings initiated by or on behalf of the company. These proceedings could include shareholder derivative actions or any lawsuit where the company itself is a party, and the individual is being sued or brought into the case due to their role or involvement with the company.
This indemnity is designed to protect individuals from financial loss resulting from legal actions that are connected to their duties to the company, provided they acted in good faith and within the scope of their authority. It is often used to attract and retain talented executives and officers, as it offers them protection from the potential financial risks of being involved in legal disputes while performing their job.
Why is indemnity in proceedings by or in the right of the company important?
Indemnity in proceedings by or in the right of the company is important because it offers protection for company officers and directors against the financial consequences of being sued in their capacity as representatives of the company. This provision is crucial for ensuring that individuals are not deterred from taking necessary actions to benefit the company for fear of personal financial liability.
For businesses, offering indemnity provisions helps attract experienced and capable leaders who are willing to take on significant responsibilities without the fear of personal financial risk. It also helps ensure that executives and officers focus on their duties without undue concern over potential legal disputes. For the individuals protected by the indemnity, it offers peace of mind and allows them to perform their roles confidently, knowing they have financial protection in case of legal proceedings.
Understanding indemnity in proceedings by or in the right of the company through an example
Imagine a CEO of a corporation is involved in a shareholder derivative lawsuit, where shareholders claim that the CEO made decisions that harmed the company’s value. The company has an indemnity provision in its bylaws that covers legal costs and any potential damages that the CEO might incur as a result of the lawsuit, provided the CEO acted in good faith and in the best interests of the company. The indemnity would cover legal fees and any financial penalties awarded, protecting the CEO from personal financial loss.
In another example, a board member of a company is named in a lawsuit by a competitor alleging unfair competition. The board member is acting in their official capacity in the interest of the company. The company’s indemnity clause ensures that the board member will not have to personally cover the costs of defending the lawsuit, and the company will indemnify the board member for legal expenses and any settlement costs, provided they acted within the scope of their role and responsibilities.
An example of indemnity in proceedings by or in the right of the company clause
Here’s how an indemnity clause in proceedings by or in the right of the company might appear in a corporate agreement:
“The Company shall indemnify and hold harmless any director, officer, or employee of the Company from and against any and all expenses, including legal fees, judgments, and settlements, incurred in connection with any legal proceeding brought by or in the right of the Company, provided that the individual acted in good faith and in the best interests of the Company. Indemnity shall not apply in cases of fraud, gross negligence, or willful misconduct.”
Conclusion
Indemnity in proceedings by or in the right of the company is a critical protection for directors, officers, and employees involved in legal actions related to their roles within the company. It ensures that individuals are not personally financially responsible for legal costs or damages when acting in good faith and for the company’s benefit. For businesses, providing this indemnity helps secure talented and experienced leadership while promoting a risk-managed environment. For individuals, it offers reassurance that they are protected from personal financial consequences when fulfilling their corporate responsibilities.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.