Indemnification and Advancement of Directors and Officers for a Utah Corporation Doing Business in California

Corporate counsel is asked to make many decisions on behalf of a corporate client. A corporate client may seek advice on choice of law selection or where it should incorporate. At the initial founding stages, many clients do not consider that the place of incorporation and choice of law will affect the corporation’s obligations to indemnify and advance expenses to directors and officers.sealofutahstateseal

For this analysis, even if the client chooses to incorporate in Utah, if most of its business is being performed in California, it will be deemed a “quasi-California” corporation pursuant to California Corporations Code section 2115 and will be made subject to several California laws regulating corporations.[1] If the corporation wants to initiate a lawsuit against a director or officer that has failed to act in the best interest of the corporation, counsel must consider where the corporation should file the lawsuit. Crucial to this consideration is that California and Utah have different standards for granting indemnification and advancement of expenses. The choice of forum will dictate the requirements and obligations of the corporation to advance and indemnify its officers and directors.

Indemnification:

A Utah corporation that meets the requirements set forth in California Corporations Code section 2115 will be deemed a “quasi-California” corporation and will be subject to a host of expressly delineated laws regulating out-of-state corporations. Included in the list of applicable provisions is California Corporations Code section 317, California’s law on indemnification and advancement. Section 317(e) provides the law on indemnification:

“any indemnification under this section shall be made by the corporation only if authorized in the specific case, upon a determination that indemnification of the agent is proper in the circumstances because the agent has met the applicable standard of conduct …”

The indemnification provision of section 317 is limited by a standard of conduct determination, meaning that the corporation will have some ability to control who receives indemnification and who does not. The standard of conduct set forth in section 317(b) requires a determination that the person to be indemnified “acted in good faith and in a manner the person reasonably believed to be in the best interest of the corporation…” By comparison, the indemnification statute in Utah operates the same way, requiring the corporation to make a determination that the person to be indemnified has met the applicable standard of conduct and has taken action in good faith and in a manner he or she reasonably believed was in the best interest of the corporation.[2] With little variance between the indemnification provisions in California and Utah, it could be expected that the law on advancement would also be similar. But that would be an incorrect assumption.

Advancement:

The Utah statute on advancement is similar to the indemnification statute, requiring that, “a determination is made that the facts then known to those making the determination would not preclude indemnification…”[3] However, unlike the Utah statute, the advancement provision in California is not limited by a standard of conduct determination, or any determination at all. Instead, the California advancement statute states:

“Expenses incurred in defending any proceeding may be advanced by the corporation prior to the final disposition of the proceeding upon receipt of an undertaking by or on behalf of the agent to repay that amount if it shall be determined ultimately that the agent is not entitled to be indemnified as authorized in this section.”

See Cal. Corp. Code § 317(f).

The only requirement for advancement under California law is that the person seeking advancement deliver an undertaking to repay the amount advanced if it is ultimately determined that he or she is not entitled to be indemnified. It is unclear whether the delivery of an undertaking requires anything more than a written promise to pay back any amounts advanced.

This is an important and interesting distinction between California and Utah law, and one that counsel must consider in evaluating disputes between a Utah corporation and its officers and directors. The result of choosing to apply California law is that the corporation might be obligated to provide advancement to its directors and officers without any determination of whether that person meets the applicable standard of conduct, limiting its ability to deny advancement those who have acted outside the best interests of the corporation.

[1] For the full list of provisions quasi-California corporations are made subject to, see California Corporations Code § 2115(b).

[2] Utah Revised Business Corporation Act 16-10a-902(1).

[3] Utah Revised Business Corporation Act 16-10a-904(1).

gina-correia_092-2-300x200

For more information about this topic, contact Gina Correia at (818) 444-4500 or gcorreia@stubbsalderton.com.  Gina Correia is a litigation associate of the Firm. Gina’s practice focuses on all stages of business litigation. Prior to joining the firm, Gina worked in-house as a business affairs law clerk for HBO. Gina’s prior experience in the entertainment industry focused on talent engagement negotiations including drafting contract request, calculating actor, producer, and writer fees for top-tier talent, and evaluating comprehensive deal points. Gina also previously worked for The Los Angeles Office of the District Attorney in the Consumer Protection Division where she researched and analyzed wire-tapping violations under Penal Code and Federal Trade Commission guidelines.

FacebookTwitterGoogle+LinkedInEmail