More on CA Indemnification – Sections 204 & 25505

In the previous post, we discussed some of the basics of California Corporations Code Section 317. As we saw, Section 317 is essentially concerned with indemnification of corporate directors and officers for actions that arise when directors and officers act in the best interests of the company. In some cases, corporations may indemnify directors and officers; and in other cases, corporations must indemnify directors and officers.

California Corporations Code Section 204 builds on the foundation provided by Section 317 in an important way. Furthermore, Section 25505 provides corporations with a layer of protection that may be needed in certain situations. In this post, we will give a basic overview of these two Sections.

Section 204: Elimination / Minimization of Liability for Breach of Duty

 Section 204 builds on Section 317 by allowing corporations to provide additional protections to corporate agents. More specifically, Section 204 enables corporations to either eliminate or minimize the personal liability of corporate directors or officers for an action deriving from breach of duty. However, to provide such protection, corporations must include language in their articles of incorporation.

 Furthermore, Section 204 also allows corporations to indemnify corporate agents in actions deriving from breach of duty beyond what is normally permitted in Section 317. To do this, language must be included in the articles of incorporation which authorizes this level of indemnification. These are very significant provisions within California law, as agents are not normally protected in cases involving breach of duty in other jurisdictions.

Section 25505: Corporate Indemnification for Willful Violation of Securities Laws

Section 25505 gives a good example of how legal protections can run in the other direction. Unlike Sections 317 and 204, Section 25505 provides protection for corporations in cases involving willful violation of Corporate Securities Laws by an officer, director or another controlling person. Section 25505 states that corporations have a right to be indemnified by the violator in such situations. If a director, officer, or other controlling person violates the CA Corporate Securities Laws such that the corporation becomes liable, then the indemnification provision of Section 25505 may apply.

Corporations Should Create Protective Language & Obtain Insurance

Corporations should encourage their agents to work in the best interests of the company in the widest range of circumstances. Toward this end, corporations should integrate language into their organizational documents (i.e. articles of incorporation, bylaws, etc.) which provides the maximal level of protection for agents. Then, corporations should also obtain insurance which will allow them to provide protection without jeopardizing their financial stability.

Reach Out to Weavil Law for More Information

The provisions of these sections can be a bit complex in their finer points. For more information, reach out to Weavil Law today by calling 650-308-8187 or by email at contact@weavillaw.com.

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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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