CA Indemnification Essentials – Section 317

In the corporate world, one recurring issue is the payment of expenses, judgments, fines, and other costs resulting from corporate agents acting in the best interests of a corporation. Under the California Corporations Code, corporations may indemnify – and, in some cases, must indemnify – agents if they become parties to an action which arises from their conduct as agents of the corporation. This is true for both civil actions and criminal proceedings; however, for criminal proceedings, the agent-defendant must have no reasonable cause to believe that the alleged conduct was unlawful. Litigation can be quite expensive, particularly here in the State of California. This means that the indemnification provisions of Section 317 can be very significant.

In this post, we are going to provide an account of the essentials of California Corporations Code Section 317, subsections (b) through (e). These subsections provide the basic framework for the indemnification of corporate agents (which includes directors and officers). In the next post, we will build on this account by discussing California Corporations Code Sections 204 and 25505. As we will see, those sections pertain to additional indemnification of corporate directors and officers for breach of duty, and also the right of corporations to be indemnified by directors and officers in certain cases.

Overview of Subsections (b) and (c)

Subsection (b) of Section 317 provides that corporations may indemnify agents in any “proceeding” (which is one of the key terms of this subsection) as long as the agents acted in good faith in the best interests of the corporation. As mentioned, this subsection also indicates that indemnification in criminal proceedings may only occur if the agent had no reasonable cause to suppose that the alleged conduct was unlawful.

Subsection (c) supplements the previous subsection by adding that corporations have the power to indemnify corporate agents in any “threatened, pending, or completed action.” This expands the scope of the basic indemnification provision. However, subparagraphs (1) through (3) of subsection (b) lay out the exceptions to this general principle. Corporations and agents should be aware of these exceptions so that they fully understand the limits of this provision. Subparagraph (2), for instance, restricts indemnification in cases involving dispositions of pending actions without prior court approval.

 Additional Subsections (d) and (e)

While subsections (b) and (c) establish the basic framework for indemnification of corporate agents, subsection (d) takes these provisions a step further and mandates indemnification in certain circumstances. Specifically, subsection (d) states that corporations must indemnify agents who successfully defend against actions on their merits. This applies to both civil and criminal cases.

Subsection (e) has additional information about the implementation of the indemnification provisions of subsections (b) and (c). In addition to meeting the standard of applicability of subsections (b) and (c) – i.e. acted in good faith in the best interests of the corporation – indemnification must be authorized in one of the ways identified in subparagraphs (1) through (4). These subparagraphs provide different avenues of authorization for agents seeking indemnification. For instance, subparagraph (1) provides that authorization may be granted by a majority vote of a quorum, which consists of directors, as long as those directors are not parties of the proceeding itself.

Contact Weavil Law for Additional Information

 As mentioned, we will follow up on this topic with a post on Sections 204 and 25505. In the meantime, if you would like to learn more, reach out to us by email at contact@weavillaw.com or calling 650-308-8187.

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Weavil Law

At Weavil Law PC, our unique approach to Corporate and Healthcare counsel is informed by decades of experience. Scott Weavil is Weavil Law PC’s founder and Principal Attorney. He began his career as a Mergers and Acquisitions attorney at Skadden in New York City, consistently ranked among the top law firms in the country.
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