Code of Virginia

Code of Virginia
Title 13.1. Corporations
8/9/2020

Article 10. Indemnification.

§ 13.1-696. Definitions.

As used in this article:

"Corporation" includes any corporation and any domestic or foreign predecessor entity of a corporation in a merger or other transaction in which the predecessor's existence ceased upon consummation of the transaction.

"Director" or "officer" means an individual who is or was a director or officer, respectively, of a corporation or who, while a director or officer of the corporation, is or was serving at the corporation's request as a director, officer, manager, partner, trustee, employee, or agent of another entity or employee benefit plan. A director or officer is considered to be serving an employee benefit plan at the corporation's request if the individual's duties to the corporation also impose duties on, or otherwise involve services by, the individual to the plan or to participants in or beneficiaries of the plan. "Director" or "officer" includes, unless the context requires otherwise, the estate or personal representative of a director or officer.

"Liability" means the obligation to pay a judgment, settlement, penalty, fine, including any excise tax assessed with respect to an employee benefit plan, or expenses incurred with respect to a proceeding.

"Official capacity" means (i) when used with respect to a director, the office of director in a corporation and (ii) when used with respect to an officer, as contemplated in § 13.1-702, the office in a corporation held by the officer. "Official capacity" does not include service for any other entity or employee benefit plan.

"Party" means an individual who was, is, or is threatened to be made a defendant or respondent in a proceeding.

"Proceeding" means any threatened, pending, or completed action, suit, or proceeding, whether civil, criminal, administrative, arbitrative, or investigative and whether formal or informal.

Code 1950, § 13.1-3.1; 1968, c. 570; 1975, c. 500; 1979, c. 99; 1985, c. 522; 2005, c. 765; 2009, c. 587; 2019, c. 734.

§ 13.1-697. Authority to indemnify.

A. Except as provided in subsection D, a corporation may indemnify an individual who is a party to a proceeding because the individual is or was a director against liability incurred in the proceeding if:

1. The director:

a. Conducted himself in good faith; and

b. Believed:

(1) In the case of conduct in his official capacity with the corporation, that his conduct was in its best interests; and

(2) In all other cases, that his conduct was at least not opposed to its best interests; and

c. In the case of any criminal proceeding, he had no reasonable cause to believe his conduct was unlawful; or

2. The director engaged in conduct for which broader indemnification has been made permissible or obligatory as authorized by subsection C of § 13.1-704.

B. A director's conduct with respect to an employee benefit plan for a purpose he believed to be in the interests of the participants in and beneficiaries of the plan is conduct that satisfies the requirement of subdivision A 1 b (2).

C. The termination of a proceeding by judgment, order, settlement, or conviction, or upon a plea of nolo contendere or its equivalent, is not, of itself, determinative that the director did not meet the relevant standard of conduct described in this section.

D. Unless ordered by a court under subsection C of § 13.1-700.1 or broader indemnification has been made permissible or obligatory as authorized by subsection C of § 13.1-704, a corporation may not indemnify a director under this section:

1. In connection with a proceeding by or in the right of the corporation except for expenses incurred in connection with the proceeding if it is determined that the director has met the relevant standard under subsection A; or

2. In connection with any other proceeding charging improper personal benefit to the director, whether or not involving action in his official capacity, in which he was adjudged liable on the basis that personal benefit was improperly received by him.

Code 1950, § 13.1-3.1; 1968, c. 570; 1975, c. 500; 1979, c. 99; 1985, c. 522; 2005, c. 765; 2019, c. 734.

§ 13.1-698. Mandatory indemnification.

Unless limited by its articles of incorporation, a corporation shall indemnify a director who was wholly successful, on the merits or otherwise, in the defense of any proceeding to which the director was a party because the director is or was a director of the corporation against expenses incurred by the director in connection with the proceeding.

Code 1950, § 13.1-3.1; 1968, c. 570; 1975, c. 500; 1979, c. 99; 1985, c. 522; 2019, c. 734.

§ 13.1-699. Advance for expenses.

A. A corporation may, before final disposition of a proceeding, advance funds to pay for or reimburse the expenses incurred in connection with the proceeding by a director who is a party to a proceeding because the individual is a director if the director delivers to the corporation a signed written undertaking to repay any funds advanced if (i) the director is not entitled to mandatory indemnification under § 13.1-698 and (ii) it is ultimately determined under § 13.1-700.1 or 13.1-701 that the director is not entitled to indemnification.

B. The undertaking required by subsection A shall be an unlimited general obligation of the director but need not be secured and may be accepted without reference to the financial ability of the director to make repayment.

C. Authorizations under this section shall be made by:

1. The board of directors:

a. If there are two or more disinterested directors, by a majority vote of all the disinterested directors, a majority of whom shall for such purpose constitute a quorum, or by a majority of the members of a committee consisting solely of two or more disinterested directors appointed by such a vote; or

b. If there are fewer than two disinterested directors, by the vote necessary for action by the board of directors in accordance with subsection C of § 13.1-688, in which authorization directors who do not qualify as disinterested directors may participate; or

2. By the shareholders, but shares owned by or voted under the control of a director who at the time does not qualify as a disinterested director may not be voted on the authorization.

Code 1950, § 13.1-3.1; 1968, c. 570; 1975, c. 500; 1979, c. 99; 1985, c. 522; 2005, c. 765; 2010, c. 782; 2015, c. 611; 2019, c. 734.

§ 13.1-700. Repealed.

Repealed by Acts 1987, cc. 59, 257.

§ 13.1-700.1. Court orders for advance, reimbursement, or indemnification.

A. An individual who is a party to a proceeding because he is a director of the corporation may apply for indemnification or an advance of expenses to the court conducting the proceeding or to another court of competent jurisdiction. After receipt of an application and after giving any notice it considers necessary, the court shall:

1. Order indemnification if the court determines that the director is entitled to mandatory indemnification under § 13.1-698;

2. Order indemnification or advance for expenses if the court determines that the director is entitled to indemnification or advance for expenses pursuant to a provision authorized by § 13.1-704; or

3. Order indemnification or advance for expenses if the court determines, in view of all the relevant circumstances, that it is fair and reasonable (i) to indemnify the director or (ii) to advance expenses to the director, even if, in the case of clause (i) or (ii), the director has not met the relevant standard of conduct set forth in subsection A of § 13.1-697, failed to comply with § 13.1-699, or was adjudged liable in a proceeding referred to in subsection D of § 13.1-697, but if the director was adjudged so liable, indemnification shall be limited to expenses incurred in connection with the proceeding.

B. If the court determines that the director is entitled to indemnification under subdivision A 1 or to indemnification or advance for expenses under subdivision A 2, it shall also order the corporation to pay the director's expenses incurred in connection with obtaining court-ordered indemnification or advance for expenses. If the court determines that the director is entitled to indemnification or advance for expenses under subdivision A 3, it may also order the corporation to pay the director's expenses to obtain court-ordered indemnification or advance for expenses.

C. Neither (i) the failure of the corporation, including its board of directors, its independent legal counsel and its shareholders, to have made a determination prior to the commencement of any action permitted by this section that the applying director is entitled to receive an advance, reimbursement, or indemnification nor (ii) the determination by the corporation, including its board of directors, its independent legal counsel and its shareholders, that the applying director is not entitled to receive an advance, reimbursement, or indemnification shall create a presumption to that effect or otherwise of itself be a defense to that director's application for an advance for expenses, reimbursement, or indemnification.

1987, cc. 59, 257; 2005, c. 765; 2019, c. 734.

§ 13.1-701. Determination and authorization of indemnification.

A. A corporation may not indemnify a director under § 13.1-697 unless authorized for a specific proceeding after a determination has been made that indemnification of the director is permissible because the director has met the relevant standard of conduct set forth in § 13.1-697.

B. The determination shall be made:

1. If there are two or more disinterested directors, by the board of directors by a majority vote of all the disinterested directors, a majority of whom shall for such purpose constitute a quorum, or by a majority of the members of a committee of two or more disinterested directors appointed by such a vote;

2. By special legal counsel:

a. Selected in the manner prescribed in subdivision 1; or

b. If there are fewer than two disinterested directors, selected by the board of directors, in which selection directors who do not qualify as disinterested directors may participate; or

3. By the shareholders, but shares owned by or voted under the control of a director who at the time does not qualify as a disinterested director may not be voted on the determination.

C. Authorization of indemnification shall be made in the same manner as the determination that indemnification is permissible, except that if there are fewer than two disinterested directors or if the determination is made by special legal counsel, authorization of indemnification shall be made by those entitled to select special legal counsel under subdivision B 2.

Code 1950, § 13.1-3.1; 1968, c. 570; 1975, c. 500; 1979, c. 99; 1985, c. 522; 2005, c. 765; 2019, c. 734.

§ 13.1-702. Advance for expenses and indemnification for officers.

Unless limited by a corporation's articles of incorporation:

1. An officer of the corporation who is a party to a proceeding because he is an officer is entitled to mandatory indemnification under § 13.1-698 and is entitled to apply for court-ordered advance or reimbursement of expenses and indemnification under § 13.1-700.1, in each case to the same extent as a director; and

2. The corporation may indemnify and advance expenses under this article to an officer who is a party to a proceeding because the individual is an officer to the same extent as to a director.

Code 1950, § 13.1-3.1; 1968, c. 570; 1975, c. 500; 1979, c. 99; 1985, c. 522; 2005, c. 765; 2019, c. 734.

§ 13.1-703. Insurance.

A corporation may purchase and maintain insurance on behalf of an individual who is or was a director or officer of the corporation, or who, while a director or officer of the corporation, is or was serving at the request of the corporation as a director, officer, partner, trustee, employee, or agent of another entity, against liability asserted against or incurred by the individual in that capacity or arising from the individual's status as a director or officer, regardless of whether the corporation would have power to indemnify or advance expenses to the individual against the same liability under this article.

Code 1950, § 13.1-3.1; 1968, c. 570; 1975, c. 500; 1979, c. 99; 1985, c. 522; 2005, c. 765; 2019, c. 734.

§ 13.1-704. Application of article.

A. Unless the articles of incorporation or bylaws expressly provide otherwise, any authorization of indemnification or advances or reimbursement of expenses in the articles of incorporation or bylaws shall not be deemed to prevent the corporation from providing indemnity or advances or reimbursement of expenses permitted or mandated by this article.

B. A corporation, by a provision in its articles of incorporation or bylaws or in a resolution adopted or a contract approved by the board of directors or shareholders, may obligate itself in advance of the act or omission giving rise to a proceeding to provide indemnification in accordance with § 13.1-697 or subsection C and advance funds to pay for or reimburse expenses in accordance with § 13.1-699. Any such obligatory provision shall be deemed to satisfy the requirements for authorization referred to in subsection C of § 13.1-699 and subsection C of § 13.1-701.

C. Any corporation shall have power to make any further indemnity, including indemnity with respect to a proceeding by or in the right of the corporation, and to make additional provision for advances and reimbursement of expenses, to any director or officer that may be authorized by the articles of incorporation or any bylaw made by the shareholders or any resolution adopted, before or after the event, by the shareholders, except an indemnity against (i) his willful misconduct or (ii) a knowing violation of criminal law. Any such provision that obligates the corporation to provide indemnification to the fullest extent permitted by law shall be deemed, unless the articles of incorporation or any such bylaw or resolution expressly provides otherwise, also to obligate the corporation to advance funds to pay for or reimburse expenses to the fullest extent permitted by law in accordance with § 13.1-699 except that the applicable standard shall be conduct that does not constitute willful misconduct or a knowing violation of criminal law, rather than the standard of conduct prescribed in § 13.1-697. Unless the articles of incorporation, or any such bylaw or resolution expressly provide otherwise, any determination as to the right to any further indemnity shall be made in accordance with subsection B of § 13.1-701. Each such indemnity may continue as to a person who has ceased to have the capacity referred to above and may inure to the benefit of the heirs, executors, and administrators of such a person.

D. A right of indemnification or advance for expenses created under this article or under subsection B and in effect at the time of an act or omission shall not be reduced, eliminated, or impaired by any amendment of the articles of incorporation or bylaws or a resolution of the board of directors or shareholders adopted after the occurrence of such act or omission unless, in the case of a right created under subsection B, the provision creating such right and in effect at the time of such act or omission explicitly authorizes such reduction, elimination, or impairment after such act or omission has occurred.

E. Any provision pursuant to subsection B shall not obligate the corporation to indemnify or advance expenses to a director of a predecessor of the corporation, pertaining to conduct with respect to the predecessor, unless otherwise expressly provided. Any provision for indemnification or advance for expenses in the articles of incorporation or bylaws, or a resolution of the board of directors or shareholders of a predecessor of the corporation in a merger or in a contract to which the predecessor is a party, existing at the time the merger takes effect, shall be governed by subdivision A 4 of § 13.1-721.

F. This article does not limit a corporation's power to pay or reimburse expenses incurred by a director or an officer in connection with his or her appearance as a witness in a proceeding at a time when he or she is not a party.

G. This article does not limit a corporation's power to provide indemnity to, advance or reimburse expenses incurred by, or provide or maintain insurance on behalf of an agent or an employee who is not a director or officer.

Code 1950, § 13.1-3.1; 1968, c. 570; 1975, c. 500; 1979, c. 99; 1985, c. 522; 1987, cc. 59, 257; 1988, c. 561; 2005, c. 765; 2007, c. 165; 2010, c. 782; 2019, c. 734.

The chapters of the acts of assembly referenced in the historical citation at the end of these sections may not constitute a comprehensive list of such chapters and may exclude chapters whose provisions have expired.

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