Serve Proudly, … But With An Indemnification Agreement!

If you are a director, officer or key employee of a corporation, at first glance Nevada law appears to protect you against liability for doing your job.  It says that if you are sued in connection with the performance of your duties and you successfully defend yourself, your company must indemnify you for the defense costs.

But it really is not that simple.  For example, what if:

1. your case drags on for months or years and you have to pay your lawyers in the meantime; or

2. you acted in good faith and reasonably believed that your actions were in the corporation’s best interests, but you did not get a judgment in your favor; or

3. you make a settlement payment, to make the case go away, before the trial ends (or even before it begins); or

4. you make no settlement payment and the plaintiff drops the case, but you still had to pay your lawyers; or

5.  no one is suing you, but you are subpoenaed to testify in someone else’s trial and you need a lawyer, just in case….

In these “what if” situations, Nevada law would generally allow the corporation to indemnify you or to advance your defense costs as you incur them (referred to as “hold harmless” protection) so you don’t go broke trying to defend yourself.  But waiting until you find yourself in this mess and then asking the corporation to pay your bills is not the best approach, to put it mildly.  At that stage, if your employer is not obligated to pay, it might choose not to pay.

If you are important enough to a company that it wants you at a high-level position (and it is usually the people at the top who get sued when things go wrong), then you need to negotiate and get a binding indemnification/hold harmless agreement at the earliest possible time and BEFORE you actually need to rely on it.  When it comes to these agreements, Nevada law can work to your advantage because it authorizes contractual arrangements for a wide range of indemnifiable events and advancement of defense costs.

In other words, there is much that a corporation is not required to protect you against, as shown in the numbered examples above, unless it agrees in advance to give you that protection.  Sometimes those protections are set forth in the corporation’s bylaws and they apply to all top-level personnel.  But complications can arise if the bylaws are later amended without your consent.  If you get a separate, properly-drafted indemnification contract, then you will have the peace of mind to know it cannot be changed without your consent.  In any event, whether these protections are in the bylaws or in your separate contract, your lawyer should make sure that it mandates indemnification and advancement of expenses to the maximum extent permitted under Nevada law (which is a pretty high maximum).

Once you get it, the “what ifs” above (and there are others) need not be a distraction to you.