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An Introduction to the Law of Corporations: Cases and Materials

DGCL Sec. 145 - Indemnification

As we learned in the Agency Course, agents acting within the scope of their agency have a common law right of indemnification.  Section 145 authorizes the corporation to indemnify agents of the corporation (including directors, officers, and other agents) under certain conditions.

Section 145(a) gives the corporation the power to indemnify agents of the corporation in suits by third parties. In such suits, the corporation may pay any judgments, fines or settlements that result from the agents actions with respect to third parties. Section 145(b) empowers the corporation to indemnify agents of the corporation in derivative suits. In the context of derivative suits, a corporation does not have the power to indemnify agents for any judgments, fines or settlements except upon application to the Chancery Court where there has not been an adjudication of liability. Under Section 145(c), where the corporate agent has succesfully defended an action, the corporation is required to indemnify the agent.

The statute envisions that directors seeking indemnification under (a) or (b) may well create conflicts as directors seek the approval of their fellow directors for indemnification. Consequently, the statute requires specific procedures prior to board approval of any such payments. These procedures attempt to mimic an arm's length approval of such payments by enlisting independent directors and/or unaffiliated stockholders. Note the analogue between an approval for purposes of ยง145 and agency law's approach to approving conflicted agent transactions.