Legal Considerations for Indemnification Clauses in Corporate Bylaws

Types of Indemnifiable Claims

Three categories of indemnifiable claims recur, and each one shapes the scope of an indemnification clause differently.

The first category comprises claims arising from third-party actions, where your directors or officers are named as defendants in lawsuits or proceedings. These claims typically involve allegations of negligence, breach of duty, or other wrongful acts.

The second category spans enforcement actions, such as regulatory investigations, administrative proceedings, or criminal prosecutions. Delaware’s statute reaches that category expressly, giving a corporation power to indemnify in “any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation).” Del. Code Ann. tit. 8, § 145(a).

The third category consists of claims brought by or on behalf of the corporation itself, including derivative lawsuits and shareholder demands. Minnesota folds that third category into the same definition as the rest, because a “proceeding” means “a threatened, pending, or completed civil, criminal, administrative, arbitration, or investigative proceeding, including a proceeding by or in the right of the corporation.” Minn. Stat. § 302A.521, subd. 1(d).

Knowing which category a claim falls into tells you what the corporation may pay and on what terms, because Delaware, California, and New York treat third-party suits and derivative suits differently even when the conduct is identical, while Minnesota applies one standard to both.

Statutory Requirements for Indemnification

Statutory frameworks governing indemnification vary by jurisdiction, and most corporate statutes condition indemnification of directors and officers on a defined standard of conduct. Minnesota makes indemnification mandatory once the statutory criteria are met, Minn. Stat. § 302A.521, subd. 2, while Delaware makes it permissive except where the director or officer succeeded on the merits or otherwise, Del. Code Ann. tit. 8, § 145(a), (c).

Jurisdiction	Statute	Indemnity Scope
Minnesota	Minn. Stat. § 302A.521	Indemnification is mandatory for a director, officer, employee, or board committee member who meets five statutory criteria, reaching judgments, penalties, fines, settlements, and reasonable expenses (subd. 2); the articles or bylaws may prohibit or condition it, including monetary limits, if the restriction applies equally across a class and is not applied retroactively (subd. 4)
Delaware	DGCL § 145	Empowers indemnification in third-party civil, criminal, administrative, and investigative proceedings against expenses, judgments, fines, and settlements (§ 145(a)); in derivative actions the power reaches expenses only, and not a person adjudged liable to the corporation absent a court determination (§ 145(b)); expenses are mandatory for a present or former director or officer who succeeds on the merits or otherwise (§ 145(c)(1))
California	Cal. Corp. Code § 317	Third-party proceedings: expenses, judgments, fines, and settlements (§ 317(b)). Derivative actions: expenses only, with court approval required for settlement amounts and for defense expenses in a settled pending action (§ 317(c)). Indemnification of expenses is mandatory when the agent succeeds on the merits (§ 317(d))
New York	BCL § 722	Permits indemnification of a director or officer against judgments, fines, amounts paid in settlement, and reasonable expenses including attorneys’ fees, where the person acted in good faith for a purpose reasonably believed to be in the corporation’s best interests and, in a criminal action or proceeding, had no reasonable cause to believe the conduct was unlawful (§ 722(a))

The differences among these statutes are specific rather than a general ranking of one state as broader than the rest. For instance, Delaware’s DGCL § 145 lets a bylaw or agreement grant indemnification rights beyond the statute without any charter authorization. California Corporations Code § 317 allows those additional rights only to the extent the corporation’s articles authorize them, and it bars indemnifying amounts paid to settle a derivative action without court approval. Minn. Stat. § 302A.521 runs the other way and makes indemnification mandatory for a person who meets its statutory conditions, unless the articles or bylaws prohibit or limit it.

New York permits a corporation to indemnify a director or officer against judgments, fines, amounts paid in settlement, and reasonable expenses, including attorneys’ fees, where the person acted in good faith for a purpose reasonably believed to be in the corporation’s best interests, under N.Y. Bus. Corp. Law § 722. Indemnification is mandatory for a person who has been successful, on the merits or otherwise, in the defense of such a proceeding, under N.Y. Bus. Corp. Law § 723. And N.Y. Bus. Corp. Law § 721 makes those statutory rights nonexclusive of broader indemnification granted by the certificate of incorporation, the bylaws, an authorized shareholder or director resolution, or an indemnification agreement.

Two New York limits belong in any broad bylaw clause. Section 721 bars indemnification once “a judgment or other final adjudication adverse to the director or officer establishes that his acts were committed in bad faith or were the result of active and deliberate dishonesty and were material to the cause of action so adjudicated, or that he personally gained in fact a financial profit or other advantage to which he was not legally entitled.” N.Y. Bus. Corp. Law § 721. And section 722(c) limits derivative-suit indemnification to settlement amounts and reasonable expenses, barring it for “a threatened action, or a pending action which is settled or otherwise disposed of,” or any claim on which the person “shall have been adjudged to be liable to the corporation,” absent a court determination. N.Y. Bus. Corp. Law § 722(c).

Delaware has also narrowed who receives its one mandatory protection. For indemnification with respect to any act or omission occurring after December 31, 2020, “officer” in DGCL § 145(c)(1) and (c)(2) means only a person deemed to have consented to service under 10 Del. C. § 3114(b), which moved every other officer out of mandatory indemnification and into the permissive category. Del. Code Ann. tit. 8, § 145(c)(1). A bylaw template that grants mandatory indemnification to “officers” without defining the term now diverges from the statutory floor for most of your officer ranks.

Corporate Obligations to Indemnify

A Minnesota corporation’s indemnification obligation comes from statute rather than from any general duty to shield directors and officers. Minn. Stat. § 302A.521, subd. 2, provides that, “Subject to the provisions of subdivision 4, a corporation shall indemnify a person made or threatened to be made a party to a proceeding by reason of the former or present official capacity of the person” who satisfies all five statutory criteria.

The five criteria are that the person has not been indemnified by another organization or employee benefit plan for the same amounts, acted in good faith, received no improper personal benefit and satisfied section 302A.255 where it applies, had no reasonable cause in a criminal proceeding to believe the conduct was unlawful, and reasonably believed the conduct was in the corporation’s best interests. For acts in the capacity of serving another organization or employee benefit plan at the corporation’s request, that last criterion instead asks whether the person reasonably believed the conduct was not opposed to the corporation’s best interests.

Subdivision 4 allows the articles or bylaws to “prohibit indemnification or advances of expenses otherwise required by this section” or to impose additional conditions, including monetary limits, that apply equally to all persons or to all persons within a given class.

In working within that obligation, weigh the following:

• Board duties: Minnesota makes indemnification mandatory rather than optional, so your indemnification clause is drafted against that default rather than creating the protection. A corporation must indemnify a director or officer sued by reason of that official capacity if the person acted in good faith, received no improper personal benefit and satisfied section 302A.255 where that director conflict-of-interest provision applies, had no reasonable cause to believe any criminal conduct was unlawful, reasonably believed the conduct was in the corporation’s best interests, and has not been indemnified for the same acts by another organization. The articles or bylaws may prohibit that indemnification or add conditions to it, including monetary limits, if the prohibition or conditions apply equally across a class. Minn. Stat. § 302A.521, subds. 2, 4.
• Who is covered: Under Minn. Stat. § 302A.521, subd. 1(c), the “official capacity” that triggers mandatory indemnification is held by a director, an officer, a member of a committee of the board, or an employee of the corporation, and subdivision 2(a) extends that protection to a person sued “by reason of the former or present official capacity of the person.” An agent of the corporation falls outside that class, and subdivision 9 leaves the corporation free to indemnify “persons other than a director, officer, employee, or member of a committee of the board of the corporation by contract or otherwise.” That is a narrower statutory reach than Delaware’s, where Del. Code Ann. tit. 8, § 145(a) gives the corporation power to indemnify a person sued “by reason of the fact that the person is or was a director, officer, employee or agent of the corporation.” If you want agents, consultants, or contractors covered, say so in the bylaws or in a separate indemnification agreement.
• Coverage that travels: the defined term also reaches a director, officer, or employee who serves at the corporation’s request as a “director, officer, partner, trustee, governor, manager, employee, or agent of another organization or employee benefit plan,” so protection follows the person you send to sit on an affiliate’s board or a benefit plan’s board. Minn. Stat. § 302A.521, subd. 1(c). The conduct standard shifts for that service: the person must have “reasonably believed that the conduct was not opposed to the best interests of the corporation,” rather than affirmatively in them. Minn. Stat. § 302A.521, subd. 2(a)(5).
• Shareholder disclosure: a corporation that indemnifies or advances expenses in connection with a proceeding by or on behalf of the corporation “shall report to the shareholders in writing the amount of the indemnification or advance and to whom and on whose behalf it was paid not later than the next meeting of shareholders.” Minn. Stat. § 302A.521, subd. 8. Closely held corporations that advance a director’s defense costs in an owner dispute routinely miss this step.
• Scope of indemnification: define what your clause covers, including the types of proceedings and expenses reached and any conditions or exclusions you intend to impose on the statutory default.
• Funding mechanisms: decide how the obligation gets funded, through insurance or from corporate funds, so the money is there when a claim arrives.

Procedures for Seeking Indemnification

Advancement is the entitlement that funds a defense while the case is pending, and in Minnesota it is statutory rather than something your bylaws must create. Subject to subdivision 4, a person made or threatened to be made a party to a proceeding is entitled, upon written request to the corporation, to payment or reimbursement of reasonable expenses in advance of the final disposition, both upon the person’s written affirmation of a good faith belief that the indemnification criteria are satisfied and a written undertaking to repay, and after a determination that the facts then known to those making the determination would not preclude indemnification, a determination made through the same ladder that governs indemnification requests. Minn. Stat. § 302A.521, subds. 3, 6.

Because subdivision 4 lets the articles or bylaws prohibit advances outright or impose conditions in addition to those in subdivisions 2 and 3, a security or solvency condition that applies equally to all persons or to all persons within a given class is a permitted drafting choice, even though the statutory undertaking standing alone “need not be secured and shall be accepted without reference to financial ability to make the repayment.” Minn. Stat. § 302A.521, subds. 3, 4.

Minnesota also supplies the decision ladder your bylaws have to work within. Determinations run to a majority of a disinterested board quorum, then a committee of non-party directors, then special legal counsel, then the shareholders, and finally a Minnesota court, which is available on an adverse determination or if no determination is made within 60 days after the later of the proceeding’s termination or the written request, or after a written request for an advance of expenses, with the burden on the person seeking payment. Minn. Stat. § 302A.521, subd. 6.

Delaware routes the same fight elsewhere. Section 145(k) vests the Court of Chancery with “exclusive jurisdiction to hear and determine all actions for advancement of expenses or indemnification brought under this section or under any bylaw,” and permits that court to “summarily determine a corporation’s obligation to advance expenses.” Del. Code Ann. tit. 8, § 145(k). Delaware also permits advancement to a current officer or director on an undertaking to repay while leaving former directors and officers, employees, and agents to whatever terms the corporation deems appropriate, so mandatory advancement there is a bylaw drafting choice. Del. Code Ann. tit. 8, § 145(e).

Against that statutory backdrop, your procedure should state what a claim submission must contain, who reviews it, how long the review takes, how notice reaches the corporation, and what happens on a denial.

Limitations on Indemnification Recovery

Four limitations shape what a corporation can actually pay:

1. Statutory limitations: Minnesota requires indemnification only where the person acted in good faith, received no improper personal benefit and satisfied section 302A.255 where it applies, was not already indemnified by another organization for the same loss, in a criminal proceeding had no reasonable cause to believe the conduct was unlawful, and reasonably believed the conduct was in the corporation’s best interests, or, for acts in the capacity of serving another organization or employee benefit plan at the corporation’s request, not opposed to those interests. Even that mandate is subject to subdivision 4, which lets the articles or bylaws prohibit or condition it where the prohibition or conditions apply equally to all persons or to all persons within a given class. The amounts covered are “judgments, penalties, fines, … settlements, and reasonable expenses.” Minn. Stat. § 302A.521, subds. 2, 4. Delaware bars indemnifying a director adjudged liable to the corporation in a derivative action absent a court order and limits such recovery to “expenses (including attorneys’ fees) actually and reasonably incurred … in connection with the defense or settlement.” Del. Code Ann. tit. 8, § 145(b). New York forbids indemnification, even under a bylaw, where a final adjudication establishes bad faith, active and deliberate dishonesty material to the claim, or “a financial profit or other advantage to which he was not legally entitled.” N.Y. Bus. Corp. Law § 721.
2. Indemnity limits: under Minn. Stat. § 302A.521, subd. 4, the bylaws may impose monetary limits on indemnification or advances of expenses, such as a recovery cap or a deductible-style threshold, but only if the limit applies equally to all persons or to all persons within a given class, and it cannot reach acts or omissions occurring before the date the bylaw provision was adopted.
3. Public policy limitations: an indemnification provision is unenforceable to the extent it exceeds the corporation’s statutory power to indemnify. Applying Delaware law, the Second Circuit held that a charter provision requiring indemnification of an officer “even if he acted in bad faith” is “inconsistent with § 145(a) and thus exceeds the scope of a Delaware corporation’s power to indemnify.” Waltuch v. Conticommodity Services, Inc., 88 F.3d 87 (2d Cir. 1996). Federal securities law adds a disclosure duty in registered offerings: where the Item 512(h) undertaking is not required because acceleration of the registration statement’s effective date is not being requested, and comparable waivers have not been obtained, Regulation S-K Item 510 requires the prospectus to carry a brief description of the indemnification provisions together with a statement that in the Commission’s opinion such indemnification “is against public policy as expressed in the Act and is therefore unenforceable.” 17 C.F.R. § 229.510.
4. Procedural limitations: you may add procedural steps, such as notice and approval requirements, but they operate as conditions “in addition to the conditions contained in subdivisions 2 and 3” and carry the same equal-application and prospective-only constraints as any other cutback. Minn. Stat. § 302A.521, subd. 4.

Indemnification of Expenses and Fees

Expense coverage under Minnesota law reaches “reasonable expenses, including attorneys’ fees and disbursements,” incurred in connection with the proceeding, and because that list is illustrative it leaves room for other reasonable litigation costs such as expert or consultant fees and court costs. Minn. Stat. § 302A.521, subd. 2(a).

Two edges of that coverage are worth drafting around. First, the section “does not require, or limit the ability of, a corporation to reimburse expenses, including attorneys’ fees and disbursements, incurred by a person in connection with an appearance as a witness in a proceeding at a time when the person has not been made or threatened to be made a party to a proceeding,” so witness expenses are the gap that well-drafted bylaws close expressly. Minn. Stat. § 302A.521, subd. 5.

Second, insurance the individual carries personally can defeat the statutory claim for the same amounts: a published Minnesota Court of Appeals decision holds that an indemnification claim by an employee of a Minnesota corporation is governed by Minn. Stat. § 302A.521 rather than Minn. Stat. § 181.970, and that a person already indemnified by her own individual liability insurer is not entitled to statutory indemnification, because an insurance company is an “organization” under subdivision 2(a)(1), a holding about the person’s own policy rather than about payment under the corporation’s directors and officers coverage. Schantzen v. Erdmann, No. A23-0495 (Minn. Ct. App. Mar. 18, 2024).

In drafting, define the scope of expense coverage, the procedure for submitting expense claims, and the timing of reimbursement, and build in review of submissions so that only reasonable and necessary expenses are reimbursed.

Insurance Coverage for Indemnification

Insurance sits beside the bylaw clause rather than duplicating it, because a Minnesota corporation “may purchase and maintain insurance on behalf of a person in that person’s official capacity against any liability asserted against and incurred by the person in or arising from that capacity, whether or not the corporation would have been required to indemnify the person against the liability under the provisions of this section.” Minn. Stat. § 302A.521, subd. 7. That closing clause is the whole point: a bylaw cap adopted under subdivision 4 narrows what the corporation reimburses, and it does not narrow what a policy can cover. California authorizes the same coverage “whether or not the corporation would have the power to indemnify the agent against that liability under this section.” Cal. Corp. Code § 317(i). Delaware’s most recent substantive amendment to its indemnification statute confirmed that permitted coverage includes insurance provided directly or indirectly through a captive insurance company, subject to three mandatory policy terms. Del. Code Ann. tit. 8, § 145(g).

Common coverage types include:

• Directors and officers (D&O) liability insurance, which covers directors and officers for claims asserted against them in their official capacities. Minnesota defines that capacity broadly, reaching not only directors and officers but also members of a committee of the board, employees, and persons serving another organization or employee benefit plan at the corporation’s request. Minn. Stat. § 302A.521, subd. 1(c).
• Errors and omissions (E&O) coverage, also called professional liability coverage, which is defined by the policy rather than by statute. No Minnesota statute states what it covers, so the insuring agreement and its definition of professional services control whether a claim against the corporation or against an individual director or officer falls within it.
• Fiduciary liability insurance, which covers breaches of fiduciary duty.
• Entity coverage, which covers the corporation itself.

When you select coverage, read the policy limits, deductibles, and exclusions against the obligations your bylaws create, because the statute governs the corporation’s authority to insure and the policy governs what is actually covered.

Director and Officer Liability Concerns

Director and officer liability is what an indemnification clause exists to address, because personal assets are at risk once an individual is named. The protection has real limits, and the sections below name them.

Personal Asset Protection

A director or officer can be named individually in a lawsuit by reason of the office the person holds, which puts personal assets at risk for judgments, settlements, and the cost of defense. Indemnification clauses in the bylaws shift that exposure back to the corporation.

Delaware law gives a corporation the power to indemnify “any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding … by reason of the fact that the person is or was a director, officer, employee or agent of the corporation,” against “expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement,” if the person acted in good faith and in a manner reasonably believed to be in or not opposed to the best interests of the corporation. Del. Code Ann. tit. 8, § 145(a). Minnesota answers the same exposure by requiring the corporation to indemnify a person “made or threatened to be made a party to a proceeding by reason of the former or present official capacity of the person” who satisfies the statute’s conditions. Minn. Stat. § 302A.521, subd. 2.

For real personal asset protection, understand which instrument does which job:

• A Minnesota corporation cannot cap by bylaw what an outside claimant recovers from a director or officer. It may eliminate or limit a director’s personal liability “to the corporation or its shareholders for monetary damages for breach of fiduciary duty as a director” only “in the articles,” and never for a duty-of-loyalty breach, acts not in good faith, intentional misconduct or a knowing violation of law, liability under Minn. Stat. § 302A.559 or § 80A.76, a transaction producing an improper personal benefit, or any act or omission preceding the provision’s effective date. Minn. Stat. § 302A.251, subd. 4.
• What a bylaw can cap is the corporation’s own indemnification obligation: the articles or bylaws may impose “monetary limits on indemnification or advances of expenses, if the prohibition or conditions apply equally to all persons or to all persons within a given class,” and that limit cannot reach acts or omissions occurring before the bylaw was adopted. Minn. Stat. § 302A.521, subd. 4. Capping indemnification reduces what the corporation reimburses; it does not reduce what a court can award against the individual.
• Officer exculpation in Minnesota is new and narrow. Since August 1, 2025, the articles may eliminate or limit an officer’s personal liability, but only “to the shareholders,” only “during the time the corporation is a publicly held corporation,” and never “in any action by or in the right of the corporation.” Minn. Stat. § 302A.361, subd. 2. A closely held Minnesota corporation cannot exculpate its officers, so do not treat director and officer protection as parallel.
• Delaware places exculpation in the certificate of incorporation rather than the bylaws and now extends it to “a director or officer,” with an officer-specific carve-out barring exculpation of “[a]n officer in any action by or in the right of the corporation.” Del. Code Ann. tit. 8, § 102(b)(7).
• The protection that needs no drafting at all: a Minnesota director who discharges the duties of the position in good faith, in a manner reasonably believed to be in the best interests of the corporation, and with the care an ordinarily prudent person would exercise “is not liable by reason of being or having been a director,” and is entitled to rely on information, opinions, reports, or statements prepared by officers or employees reasonably believed reliable and competent, by counsel or public accountants within their expertise, or by a board committee on which the director does not serve, unless the director has knowledge making that reliance unwarranted. Minn. Stat. § 302A.251, subds. 1, 2.
• Draft the indemnification clause broadly enough to reach the claims your directors and officers actually face, and review it when the statutes change.

Liability Shield Limitations

Minnesota states the eligibility standard as five cumulative conditions rather than a single good faith line: the corporation “shall indemnify” a person sued “by reason of the former or present official capacity of the person” if that person has not been indemnified by another organization for the same amounts, “acted in good faith,” “received no improper personal benefit,” had “no reasonable cause to believe the conduct was unlawful” in a criminal proceeding, and “reasonably believed that the conduct was in the best interests of the corporation.” Minn. Stat. § 302A.521, subd. 2(a). Delaware draws the same conduct line, requiring that the person “acted in good faith and in a manner the person reasonably believed to be in or not opposed to the best interests of the corporation.” Del. Code Ann. tit. 8, § 145(a). California requires that the person “acted in good faith and in a manner the person reasonably believed to be in the best interests of the corporation.” Cal. Corp. Code § 317(b).

None of the three makes gross negligence a categorical bar. What Delaware and California do bar is indemnification in a derivative action where the person “shall have been adjudged to be liable to the corporation,” absent a court determination that indemnity is nonetheless fair and reasonable. Del. Code Ann. tit. 8, § 145(b). California states the same bar and adds that no indemnification may be made “[o]f amounts paid in settling or otherwise disposing of a pending action without court approval.” Cal. Corp. Code § 317(c). If you want a gross-negligence exclusion in a Minnesota corporation, you have to draft one, because the articles or bylaws “may impose conditions on indemnification or advances of expenses in addition to the conditions contained in subdivisions 2 and 3.” Minn. Stat. § 302A.521, subd. 4.

An adverse outcome is not, by itself, disqualifying: “The termination of a proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent does not, of itself, establish that the person did not meet the criteria set forth in this subdivision.” Minn. Stat. § 302A.521, subd. 2(b).

Shield effectiveness can be compromised by several factors:

Factor	Impact on Shield Effectiveness	Considerations
Statutory conditions	Conduct criteria and derivative-suit limits narrow what may be paid	Read the incorporation state’s statute before drafting
Insurance coverage	May not cover all types of claims	Review policy terms and conditions
Corporate governance	Poor governance practices may undermine shield effectiveness	Implement robust governance practices
Judicial interpretation	Courts may read indemnification clauses narrowly	Review relevant case law and judicial decisions
Regulatory oversight	Regulators may restrict indemnification of certain liabilities	Review regulatory guidance and disclosure obligations

Weigh these limitations when you draft, so the clause delivers the protection your directors and officers believe they have.

Litigation Risk Exposure

Litigation risk exposure remains a standing threat to directors and officers, who may face personal liability for their actions or omissions. That exposure arises from shareholder derivative suits, securities class actions, and regulatory enforcement actions, among other sources. Reduce it through assessment and planning rather than through the bylaw clause alone.

Some key steps:

• Conduct regular risk assessments to identify areas of potential liability
• Implement compliance programs that prevent wrongdoing before it happens
• Maintain adequate insurance coverage, including directors and officers liability insurance
• Confirm that the indemnification clause in your bylaws is drafted to reach the claims your leadership actually faces

Litigation costs, including legal fees, expert witness fees, and other expenses, add up quickly even when the corporation ultimately prevails, which is why advancement of defense costs matters as much as end-of-case indemnification.

Enforcement of Indemnification Clauses

State corporate statutes set the outer bounds of a bylaw indemnification provision. In Minnesota, indemnification is mandatory for a person who meets the statutory criteria, the articles or bylaws may prohibit or condition it only “if the prohibition or conditions apply equally to all persons or to all persons within a given class,” and a limit “may not apply to or affect” rights for acts occurring before the bylaw adopted it. Minn. Stat. § 302A.521, subds. 2, 4. A clause running past the statute in the other direction fails as well: the Second Circuit held a charter provision promising indemnification with no good-faith condition “inconsistent with § 145(a) and thus exceeds the scope of a Delaware corporation’s power to indemnify.” Waltuch v. Conticommodity Services, Inc., 88 F.3d 87 (2d Cir. 1996).

The same opinion supplies the drafting test and its flip side. Indemnification rights “may be broader than those set out in the statute, but they cannot be inconsistent with the ‘scope’ of the corporation’s power to indemnify, as delineated in the statute’s substantive provisions,” and running the other direction, “[u]nder § 145(c), mere success is vindication enough,” so a director, or an officer within the narrowed § 145(c)(1) definition described above, whose discretionary indemnification fails can still recover defense expenses after a dismissal. Waltuch v. Conticommodity Services, Inc., 88 F.3d 87 (2d Cir. 1996).

Draft the clause with precision, because its language is what a court reads when the corporation and the person seeking payment disagree.

State-Specific Indemnification Laws

Bylaws must comply with the corporate statute of the state of incorporation, and those statutes differ in ways that change what your clause can deliver.

• Delaware allows broad indemnification provisions. Del. Code Ann. tit. 8, § 145 empowers a corporation to indemnify its directors, officers, employees, and agents, and § 145(f) makes those statutory rights nonexclusive of any other rights a person may hold “under any bylaw, agreement, vote of stockholders or disinterested directors or otherwise,” subject to the good-faith standard in § 145(a) and (b).
• California is stricter. Under Cal. Corp. Code § 317(g), additional indemnification for breach of duty to the corporation and its shareholders is available only “to the extent the additional rights to indemnification are authorized in an article provision adopted pursuant to paragraph (11) of subdivision (a) of Section 204,” and other additional rights under a bylaw, agreement, or shareholder vote are available only “to the extent the additional rights to indemnification are authorized in the articles of the corporation,” so a California corporation cannot broaden indemnification through its bylaws alone. That subdivision also supplies a construction rule: an article provision authorizing indemnification “to the fullest extent permissible under California law” is read as authorizing both categories of additional rights.
• Advancement there is permissive and conditioned on “an undertaking by or on behalf of the agent to repay that amount” if indemnification turns out to be unavailable. Cal. Corp. Code § 317(f).
• New York sets a stricter conduct bar than Delaware. N.Y. Bus. Corp. Law § 722(a) authorizes indemnification only where the director or officer “acted, in good faith, for a purpose which he reasonably believed to be in … the best interests of the corporation,” reserving the looser “not opposed to” alternative for service to another enterprise at the corporation’s request. Minnesota applies a “best interests of the corporation” standard to conduct in the official capacity of a director, officer, board committee member, or employee, and makes indemnification mandatory by default rather than permissive, subject to any prohibition or condition the articles or bylaws adopt. Minn. Stat. § 302A.521, subds. 2(a), 4.
• Advance indemnification, notice, and disclosure requirements differ. Minn. Stat. § 302A.521, subd. 3, conditions an advance on the person’s written request, a written affirmation of a good faith belief that the indemnification criteria are satisfied, and a written undertaking to repay, and then only after a determination that the facts then known to those making the determination would not preclude indemnification, and subdivision 8 then requires a written shareholder report of any indemnification or advance paid in a proceeding by or on behalf of the corporation, no later than the next shareholder meeting. Del. Code Ann. tit. 8, § 145(e) asks only for an undertaking to repay and imposes no comparable shareholder report.
• Coverage continues after service ends. Delaware indemnification and advancement “shall, unless otherwise provided when authorized or ratified, continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person,” so a sunset has to be written into the grant up front. Del. Code Ann. tit. 8, § 145(j).

Failing to account for these differences produces clauses that are unenforceable in part, which leaves directors and officers without the protection they were promised.

Frequently Asked Questions

Can Indemnitees Seek Indemnification for Claims Against Them Personally?

A director, officer, employee, or board committee member sued personally by reason of a present or former official capacity is entitled to indemnification under Minn. Stat. § 302A.521, subd. 2, only on satisfying every one of five criteria, including good faith, receipt of no improper personal benefit, no reasonable cause in a criminal proceeding to believe the conduct was unlawful, and a reasonable belief that the conduct served the corporation’s best interests; and even then the right yields to subdivision 4, which permits the articles or bylaws to prohibit indemnification or to add conditions such as monetary limits, so long as they apply equally to all persons or to all persons within a given class. Indemnification is reimbursement after the fact, not immunity from being sued.

Are Indemnification Clauses Applicable to All Corporate Stakeholders?

Indemnification protects the people who act for the corporation rather than every stakeholder in it. Minn. Stat. § 302A.521, subd. 2(a), requires a corporation to indemnify a person sued “by reason of the former or present official capacity of the person,” and subd. 1(c) defines that capacity as the position of a director, an officer, a member of a committee of the board, or an employee. Shareholders, creditors, and other stakeholders acquire no indemnification right in that status; a corporation that wants to cover someone outside those four categories must do so “by contract or otherwise” under subd. 9.

Can a Company Indemnify Officers for Intentional Misconduct?

An officer whose conduct fails the statutory standard is not entitled to indemnification, and intentional misconduct will ordinarily fail it, because Minnesota makes indemnification mandatory only where the officer acted in good faith, received no improper personal benefit, reasonably believed the conduct was in the corporation’s best interests, and, in a criminal proceeding, had no reasonable cause to believe the conduct was unlawful. Minn. Stat. § 302A.521, subd. 2.

Gross negligence is not itself a statutory bar, so a corporation that wants to exclude it must add that condition in its articles or bylaws, which subdivision 4 permits as long as the limit applies equally to everyone in the affected class. The test is honesty in fact, which Minn. Stat. § 302A.011, subd. 13, defines as “honesty in fact in the conduct of the act or transaction concerned.” And the question is rarely resolved by the outcome alone: in Augustine v. Arizant Inc., 751 N.W.2d 95 (Minn. 2008), the Minnesota Supreme Court held that an officer’s guilty plea to aiding and abetting a federal offense, together with his related admissions, did not establish as a matter of law that he did not act in good faith, leaving the question for the fact finder.

Do Indemnification Clauses Apply to Derivative Lawsuits?

Derivative suits fall within the indemnification statutes, but on narrower terms than third-party claims. Del. Code Ann. tit. 8, § 145(b) authorizes indemnification of a person sued “by or in the right of the corporation” against “expenses (including attorneys’ fees) actually and reasonably incurred by the person in connection with the defense or settlement of such action or suit,” and bars it as to any claim on which the person “shall have been adjudged to be liable to the corporation” absent a court determination. Cal. Corp. Code § 317(c) tracks that structure and adds that no indemnification may be made “[o]f amounts paid in settling or otherwise disposing of a pending action without court approval.”

Minnesota reaches further: Minn. Stat. § 302A.521, subd. 1(d), defines a “proceeding” to include “a proceeding by or in the right of the corporation,” and subdivision 2 makes indemnification mandatory in that proceeding, covering judgments, penalties, fines, settlements, and reasonable expenses, with no expenses-only cap. In Minnesota, indemnification is lost by failing the subdivision 2 criteria, such as bad faith or an improper personal benefit, rather than because the suit was derivative, and subdivision 2(b) provides that the termination of a proceeding by judgment, order, settlement, conviction, or a nolo contendere plea “does not, of itself, establish that the person did not meet the criteria set forth in this subdivision.” A clause silent on derivative suits does not exclude them.

Can Indemnification Clauses Be Modified or Waived Retroactively?

Retroactive narrowing is the one change a corporation generally cannot make. Under Minn. Stat. § 302A.521, subd. 4, “[a] prohibition or limit on indemnification or advances may not apply to or affect the right of a person to indemnification or advances of expenses with respect to any acts or omissions of the person occurring prior to the effective date of a provision in the articles or the date of adoption of a provision in the bylaws establishing the prohibition or limit on indemnification or advances.”

Delaware draws the same line: a right arising under a bylaw “shall not be eliminated or impaired by an amendment to or repeal or elimination of the certificate of incorporation or the bylaws after the occurrence of the act or omission” underlying the proceeding, unless the provision in effect at the time of that act or omission explicitly authorizes the elimination or impairment. Del. Code Ann. tit. 8, § 145(f). The Delaware Court of Chancery reads that provision to mean the covered person’s rights vest through service, so they “cannot be amended retroactively unless the original grant of protection specifically contemplated the possibility of after-the-fact amendment,” and they “operate like occurrence-based insurance coverage.” Marino v. Patriot Rail Co. LLC, 131 A.3d 325 (Del. Ch. 2016). Draft amendments to operate prospectively.