Indemnification of Directors, Officers, and Employees

When Must a Minnesota Company Pay for an Officer’s or Employee’s Defense?

A Minnesota corporation must indemnify a person sued because of a position with the company whenever that person meets all five statutory conditions, unless the articles or bylaws have validly changed the rule. An LLC has the same default duty.

Under Minn. Stat. § 302A.521, subd. 2, “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 against judgments, penalties, fines.” The list continues through “settlements, and reasonable expenses, including attorneys’ fees and disbursements, incurred by the person in connection with the proceeding.” In plain terms, the company pays both what the person owes at the end and what the person spent defending.

A bank or bank holding company also faces a federal limit. Under 12 C.F.R. § 359.3, “No insured depository institution or depository institution holding company shall make or agree to make any prohibited indemnification payment, except as provided in this part.” The definition in 12 C.F.R. § 359.1(l)(1) includes paying a person’s “civil money penalty or judgment resulting from any administrative or civil action instituted by any federal banking agency.” It also covers other liability or legal expense in such an action if the action ends in a final order or settlement against the person. That order or settlement must assess a civil money penalty, remove the person from office or bar the person from the institution’s affairs, or require the person to cease and desist or take affirmative action.

“Shall” makes the payment a duty once the conditions are met, rather than a favor the board grants. “Threatened to be made a party” means the duty can arise before anyone files suit. And “former or present” means a person who has left the company keeps the right for conduct while in the position.

For an LLC, Minn. Stat. § 322C.0408, subd. 2, uses the same structure: “Subject to the provisions of subdivision 4, a limited liability company 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 Does the Minnesota Indemnification Statute Cover?

The corporate statute covers directors, officers, members of board committees, and employees, including people serving another organization at the company’s request. Since 2024, a published Court of Appeals decision confirms that it reaches every employee of a Minnesota corporation, whatever the title.

Minn. Stat. § 302A.521, subd. 1, defines the covered “official capacity.” For anyone other than a director, it means “the elective or appointive office or position held by an officer, member of a committee of the board, or the employment relationship undertaken by an employee of the corporation.” It also covers a director, officer, or employee who “is or was serving at the request of the corporation or whose duties in that position involve or involved service as a director, officer, partner, trustee, governor, manager, employee, or agent of another organization or employee benefit plan.” That clause follows a person you send to sit on a subsidiary’s board or a benefit plan committee.

In Schantzen v. Erdmann, No. A23-0495 (Minn. Ct. App. Mar. 18, 2024), a clinic argued that the statute protects only corporate decision makers, not a massage therapist sued for malpractice. The court disagreed and held that the statute “applies to indemnification claims by all employees of Minnesota corporations who are sued by reason of their employment relationship, regardless of their title or role at the corporation.”

“Corporation” also “includes a domestic or foreign corporation that was the predecessor of the corporation referred to in this section in a merger or other transaction in which the predecessor’s existence ceased upon consummation of the transaction.” Under subdivision 9, the section does not “limit the power of the corporation to indemnify persons other than a director, officer, employee, or member of a committee of the board of the corporation by contract or otherwise.” For independent contractors and agents, the section leaves indemnification to the company’s contract or other choice.

An LLC’s statute adds one category a corporation’s lacks. Minn. Stat. § 322C.0408, subd. 1, covers “the scope of the services provided by members of the limited liability company who provide services to the limited liability company,” so an owner who works in the business is covered for that work.

What Five Conditions Must the Person Meet?

The person must not already be indemnified elsewhere for the same amounts, must have acted in good faith, and must have received no improper personal benefit. In a criminal proceeding, the person must have had no reasonable cause to believe the conduct was unlawful. The person must also have reasonably believed the conduct was in the company’s best interests, or, for service to another organization at the company’s request, not opposed to them. All five must be met.

Minn. Stat. § 302A.521, subd. 2(a), lists the conditions:

1. The person “has not been indemnified by another organization or employee benefit plan for the same judgments” and other amounts.
2. The person “acted in good faith”.
3. The person “received no improper personal benefit and section 302A.255, if applicable, has been satisfied”. That cross-reference is the rule for director conflicts of interest.
4. The person, “in the case of a criminal proceeding, had no reasonable cause to believe the conduct was unlawful”.
5. The person “reasonably believed that the conduct was in the best interests of the corporation,” or, for service to another organization at the company’s request, “reasonably believed that the conduct was not opposed to the best interests of the corporation.”

For benefit plan service, subdivision 2(a)(5) adds: “If the person’s acts or omissions complained of in the proceeding relate to conduct as a director, officer, trustee, employee, or agent of an employee benefit plan, the conduct is not considered to be opposed to the best interests of the corporation if the person reasonably believed that the conduct was in the best interests of the participants or beneficiaries of the employee benefit plan.”

For an LLC, Minn. Stat. § 322C.0408, subd. 2(a)(3), states the third condition differently: the person “received no improper personal benefit and complied with the duties stated in sections 322C.0405 and 322C.0409, if applicable.” Those sections set the limits on distributions and the standards of conduct for members, managers, and governors.

“Good faith” has a statutory meaning: “honesty in fact in the conduct of the act or transaction concerned,” under Minn. Stat. § 302A.011, subd. 13. The fiduciary duties a Minnesota director owes are explained on a separate page.

The outcome of the lawsuit does not settle the question. Subdivision 2(b) provides that “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.” In Augustine v. Arizant Inc., 751 N.W.2d 95 (Minn. 2008), a former chief executive officer had pleaded guilty to a federal misdemeanor in exchange for dismissal of felony charges. Reviewing the denial of summary judgment, the Minnesota Supreme Court held that his plea “and his related admissions do not establish, as a matter of law, that he did not act in good faith for purposes of indemnification.”

The first condition can bar payment when a person’s own insurer has already paid, as the insurance section below explains.

How Does Advancing Defense Costs Work While the Case Is Pending?

A person who is sued or threatened with suit may ask the company in writing to pay reasonable defense costs as they come due. The company pays after receiving a written good-faith affirmation and a written promise to repay, and after decision makers find that the facts then known do not rule out indemnification.

This is the practical meaning of a company’s “duty to defend” its people. Section 302A.521 does not use the word “defend.” It speaks of paying or reimbursing the person’s own reasonable expenses. Under Minn. Stat. § 302A.521, subd. 3, “the person is entitled, upon written request to the corporation, to payment or reimbursement by the corporation of reasonable expenses, including attorneys’ fees and disbursements, incurred by the person in advance of the final disposition of the proceeding.”

The steps are:

1. Written request. The person asks the company in writing.
2. Affirmation and promise to repay. The person gives “a written affirmation by the person of a good faith belief that the criteria for indemnification set forth in subdivision 2 have been satisfied and a written undertaking by the person to repay all amounts so paid or reimbursed by the corporation, if it is ultimately determined that the criteria for indemnification have not been satisfied.”
3. No collateral. The promise to repay “need not be secured and shall be accepted without reference to financial ability to make the repayment.” A company cannot refuse because the person could not repay, unless the articles or bylaws added that condition for all persons or a whole class before the acts or omissions at issue.
4. Determination. The company pays “after a determination that the facts then known to those making the determination would not preclude indemnification under this section.”

For a bank or bank holding company paying expenses in a case “initiated by any federal banking agency,” 12 C.F.R. § 359.5 adds its own board steps.

The right reaches suits brought in the company’s own name. Subdivision 1 defines “Proceeding” as “a threatened, pending, or completed civil, criminal, administrative, arbitration, or investigative proceeding, including a proceeding by or in the right of the corporation.” A shareholder’s derivative demand against a director can therefore lead to the company advancing that director’s defense costs. An LLC follows the same process under Minn. Stat. § 322C.0408, subd. 3.

Who Decides Whether the Company Pays, and What Happens After?

Directors who are not parties to the case decide first, by a quorum vote or a committee. If they cannot, special legal counsel or the shareholders decide, and a court decides if the answer is no or no answer comes. The person seeking payment carries the burden in court.

Minn. Stat. § 302A.521, subd. 6, sets the order:

1. The board, “by a majority of a quorum, if the directors who are at the time parties to the proceeding are not counted for determining either a majority or the presence of a quorum”.
2. A committee, if that quorum cannot be reached, “by a majority of a committee of the board, consisting solely of two or more directors not at the time parties to the proceeding.”
3. Special legal counsel, meaning a lawyer who “has not in the preceding five years (1) represented the corporation or a related organization in a capacity other than special legal counsel, or (2) represented a director, officer, member of a committee of the board, or employee, whose indemnification is in issue.”
4. The shareholders, “but the shares held by parties to the proceeding must not be counted in determining the presence of a quorum and are not considered to be present and entitled to vote on the determination.”
5. A Minnesota court, after an adverse determination or when none is made in the period subdivision 6 sets. “The person seeking indemnification or payment or reimbursement of expenses pursuant to this clause has the burden of establishing that the person is entitled to indemnification or payment or reimbursement of expenses.”

When every director is a party, no disinterested quorum or committee exists, so the decision moves to special legal counsel or the shareholders. Subdivision 6(b) offers a simpler route for a person who is not, and was not at the time of the conduct, a director, officer, or person with power to direct the company’s management or policies. For that person, the determination “may be made by an annually appointed committee of the board, having at least one member who is a director.” The statute adds that “The committee shall report at least annually to the board concerning its actions.” I suggest appointing that committee before it is needed, because it lets routine employee claims be handled without a full board vote.

Payment in a case brought by or for the company carries a reporting step. Under subdivision 8, 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.” For an LLC, Minn. Stat. § 322C.0408, subd. 6, sends the decision in a company without a board of governors to a vote of members, “with each member having voting power in proportion to the member’s interest in distributions,” and provides that “the membership interests held by parties to the proceeding must not be counted in determining the presence of a quorum and are not considered to be present and entitled to vote on the determination.” Subdivision 8 requires the company to “report to the members 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 members.”

How Can Your Articles, Bylaws, or Operating Agreement Change the Duty?

A Minnesota corporation’s articles or bylaws may prohibit indemnification and advances, or add conditions such as dollar caps, if the rule applies equally to everyone or to a whole class. No such change can take away rights for conduct that happened before the change.

Under Minn. Stat. § 302A.521, subd. 4, “The articles or bylaws either may prohibit indemnification or advances of expenses otherwise required by this section or may impose conditions on indemnification or advances of expenses in addition to the conditions contained in subdivisions 2 and 3 including, without limitation, 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.” The articles or bylaws can, for example, treat all directors one way and all non-management employees another.

The timing rule protects people who relied on the old terms: “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.”

Three related rules shape who can make the change:

1. Shareholder control agreement. Minn. Stat. § 302A.111, subd. 3, lists “indemnification of certain persons is required (section 302A.521)” among the provisions that govern “unless modified in the articles, in a shareholder control agreement under section 302A.457, or in the bylaws.”
2. Board power over bylaws. Under Minn. Stat. § 302A.181, subd. 2, “Unless reserved by the articles to the shareholders, the power to adopt, amend, or repeal the bylaws is vested in the board,” subject to the shareholders’ power to change the board’s bylaws.
3. LLC operating agreement. Minn. Stat. § 322C.0408, subd. 4, lets “The articles of organization or the operating agreement” prohibit or condition indemnification “if the conditions apply equally to all persons or to all persons within a given class.” For owners and managers, Minn. Stat. § 322C.0110, subd. 7, adds that “The operating agreement may alter or eliminate the indemnification for a member, manager, or governor provided by section 322C.0408, subdivision 2.”

I suggest reading your articles and bylaws against subdivision 4 before a claim arrives, because silence leaves the full statutory duty in place, and a limit adopted after the conduct comes too late.

How Is Indemnification Different From Limiting a Director’s Liability?

Indemnification moves the cost of a claim from the person to the company. A liability limit in the articles, called exculpation, removes a director’s money liability to the company and its shareholders for certain breaches. They are separate tools with separate rules.

Under Minn. Stat. § 302A.251, subd. 4, “A director’s personal liability to the corporation or its shareholders for monetary damages for breach of fiduciary duty as a director may be eliminated or limited in the articles.” Bylaws cannot do it. The articles also cannot remove liability “for any breach of the director’s duty of loyalty to the corporation or its shareholders” or “for acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law”, among other listed exceptions.

Officers get narrower treatment. Under Minn. Stat. § 302A.361, subd. 2, the articles “may provide that an officer’s personal liability to the shareholders for monetary damages for breach, during the time the corporation is a publicly held corporation, of fiduciary duty as an officer may be eliminated or limited.” The limit does not reach “in any action by or in the right of the corporation” or in the other listed cases. An officer of a corporation that is not publicly held therefore gets no liability limit from this subdivision.

An LLC’s operating agreement may do both jobs. Minn. Stat. § 322C.0110, subd. 7, says it “may eliminate or limit a member’s, manager’s, or governor’s liability to the limited liability company and members for money damages”, subject to listed exceptions that include breach of the duty of loyalty. Beyond these written tools, directors also rely on the Minnesota business judgment rule and on recording a director’s dissent when they disagree with a board action. My material on company control covers how these pieces fit together in one company’s documents.

How Does D&O Insurance Fit With the Duty to Indemnify?

A Minnesota corporation may buy directors and officers (D&O) insurance for its people, even for liabilities the company would not be required to indemnify. Insurance a person already has can also reduce what the company owes, because the statute requires that the person “has not been indemnified by another organization or employee benefit plan” for the same amounts.

Minn. Stat. § 302A.521, subd. 7, provides that “A 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.” The power to insure therefore does not depend on whether the statute or a bylaw would require the company to pay. For a bank or bank holding company, 12 U.S.C. § 1828(k)(6) and 12 C.F.R. § 359.1(l)(2) limit what insurance may cover in a federal banking agency’s case. An LLC has the same power for members, managers, and governors under Minn. Stat. § 322C.0408, subd. 7, which covers liability “in that capacity or arising from that status.” What a given policy covers depends on its terms, which is a separate question from an insurer’s duty to defend under Minnesota insurance law.

Personal insurance can end the company’s duty for the amounts it covers. In Schantzen, the employee’s own professional liability insurer paid her settlement. The Court of Appeals held that she was not entitled to indemnification under Minn. Stat. § 302A.521, subd. 2. The court reasoned that an insurance company is an “organization.” The statute requires that the person “has not been indemnified by another organization or employee benefit plan for the same judgments.” That holding concerned the person’s own policy; the court did not decide how a policy the company buys affects the claim.

Witness costs are a separate choice. Under subdivision 5, “This 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.” I suggest stating in the bylaws or a board resolution whether the company covers an employee subpoenaed as a witness, because the statute leaves that choice to the company.

What Rules Apply to Employers That Are Not Corporations or LLCs?

An employer outside Minnesota’s corporation, nonprofit, and LLC indemnification statutes may have to “defend and indemnify” an employee under a separate statute, with different conditions. That statute does not apply to employees under a contract or other agreement governing indemnification rights, to employers and employees governed by “similar laws of this state or another state specifically governing indemnification of employees” of business entities, to certain state and municipal employees, or to a liability “specifically governed by other law.”

Under Minn. Stat. § 181.970, subd. 1, “An employer shall defend and indemnify its employee for civil damages, penalties, or fines claimed or levied against the employee” if the employee meets three conditions. The employee:

1. “was acting in the performance of the duties of the employee’s position”.
2. “was not guilty of intentional misconduct, willful neglect of the duties of the employee’s position, or bad faith”.
3. “has not been indemnified by another person for the same damages, penalties, or fines.”

Subdivision 2 removes several groups from that rule, including “employees who are subject to a contract or other agreement governing indemnification rights” and “employees and employers who are governed by indemnification provisions under section 302A.521, 317A.521, or 322C.0408.” Schantzen applied that exception and held that § 302A.521, not § 181.970, governed an employee of a Minnesota corporation. Nonprofit corporations follow their own statute, Minn. Stat. § 317A.521.

These statutes also limit an employer’s ability to recover from its own employee. Minnesota common law let an employer recover from a negligent employee what the employer had to pay because of the employee’s negligence. Schantzen held that this right is cut off only where the employee proves the statutory right to indemnification: “an employee may defeat an employer’s claim by establishing the employee’s right to indemnification.” In that case, the employee did not show that her insurer had not covered the clinic’s settlement, so the court held the clinic entitled to recover that settlement from her.

What Should Your Board Decide First?

When someone who works for your company is sued, the board faces four questions. Each turns on the statute and on your own documents.

1. Is the person covered? The answer depends on whether the claim arises from a director, officer, committee, employee, or requested-service role under Minn. Stat. § 302A.521, subd. 1, or the LLC version.
2. What do your documents say? A prohibition or limit in the articles or bylaws may not affect a person’s rights for acts or omissions occurring before the provision’s effective date or adoption. For an LLC, that timing rule names the articles of organization, a member control agreement, and the bylaws.
3. Who decides? The answer depends on which directors are parties, whether a disinterested quorum exists, and whether the request is for an advance or for final indemnification.
4. What insurance applies? I suggest notifying any D&O or other carrier and asking whether the person’s own insurance has paid, because amounts another organization covered fall outside the statutory claim.

If you would like me to analyze whether your company must pay a particular indemnification or advance request, or what your bylaws or operating agreement should say, email [email protected] with a brief description of the situation.