Indemnification (Corporate)

Note: This entry covers entity-level indemnification of directors, officers, and agents under TBOC Chapter 8. For the M&A risk-allocation concept (seller's contractual obligation to compensate buyer for breach of representations and warranties), see Indemnification (M&A).

Indemnification is the legal mechanism by which a Texas business entity protects its directors, officers, and other agents from financial loss arising from claims related to their service. Texas indemnification operates on a two-tier framework: mandatory indemnification (statutorily required in specified circumstances) and permissive indemnification (authorized but not required, subject to standards of conduct and decisional procedures). The entity may also advance expenses before final disposition.

Mandatory indemnification (§ 8.051)

An entity shall indemnify a governing person against reasonable expenses (including attorney's fees) incurred in a proceeding in which the person is a respondent in their official capacity, if the person is wholly successful, on the merits or otherwise, in defense of the proceeding. Because the statute says "on the merits or otherwise," success need not come from a ruling on the merits.

Permissive indemnification (§§ 8.101, 8.102)

An entity may indemnify a governing person against judgments, settlements, and reasonable expenses, provided the person (a) acted in good faith; (b) reasonably believed, for conduct in an official capacity, that the conduct was in the entity's best interests and, in other cases, that it was not opposed to them; and (c) for criminal proceedings, had no reasonable cause to believe the conduct was unlawful. If the person is found liable to the entity or for improperly receiving a personal benefit, indemnification is limited to reasonable expenses, and none is permitted where the person is found liable for wilful or intentional misconduct in performing a duty to the entity, breach of the duty of loyalty, or an act or omission not in good faith that breaches a duty to the entity. § 8.102(b).

Decisional procedure (§ 8.103)

Determinations under § 8.101(a) must be made by (1) majority vote of the governing persons who are disinterested and independent, even if less than a quorum; (2) majority vote of a committee of such persons; (3) special legal counsel selected under (1) or (2), who may decide whether the standard of conduct is met and whether expenses are reasonable but not whether indemnification should be paid; (4) the owners, excluding interests held by governing persons who are not disinterested and independent; or (5) a unanimous vote of the owners. A governing-document provision, resolution or agreement requiring indemnification of a person who meets the standard is itself the determination that indemnification should be paid. § 8.103(b), (c).

Advancement of expenses (§ 8.104)

An entity may pay a present governing person's reasonable expenses in advance of final disposition, without the § 8.101 determinations, after receiving (1) a written affirmation of good-faith belief in meeting the standard, and (2) a written undertaking to repay if the final determination is adverse.

Limitations in governing documents (§ 8.003)

As amended effective September 1, 2021, restrictions on indemnification or advancement may appear in any "governing document" (formerly limited to the certificate of formation only). Because § 8.003 reaches indemnification the entity "must or may" provide, a governing document can restrict even mandatory indemnification under § 8.051.

Insurance (§ 8.151)

An entity may purchase D&O insurance to protect persons in their official capacity, regardless of whether the entity would have power to indemnify under Chapter 8. This supplements (does not replace) statutory and contractual indemnification.

Full entry: Indemnification (Corporate)