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CALIFORNIA CORPORATE & SECURITIES LAW

Are Charter Indemnification Provisions Contracts?

Public companies typically include provisions in their articles and bylaws that mandate indemnification of directors and officers.  Often, these provisions include a statement to the effect that the rights to indemnification are a contract right.  However, declaring that a contract exists does not necessarily establish a contract.  Fortunately, the California Civil Code provides some rules for answering the question of whether charter provisions constitute a contract.

Article and Bylaw provisions mandating indemnification would appear to meet the definition of a contract under California law, i.e., “an agreement to do or not to do a certain thing”.  Cal. Civ. Code § 1549.  In this case, the “thing” being agreed to is to provide indemnification.  Section 1549 defines what a contract is, but it doesn’t explain how it is birthed.  Pursuant to Civil Code Section 1550, a contract does not exist without all of the following:

  • Parties capable of contracting;
  • Their consent;
  • A lawful object; and
  • A sufficient cause or consideration.
Unless the officer is a minor, of unsound mind or deprived of her civil rights, capacity should not be an issue with corporate charters.  Cal. Civ. Code § 1556.
I also don’t expect that there will be much issue regarding consent (provided the indemnitee is informed of the provision).  Cal. Civ. Code § 1565.  Because Corporations Code Section 317 explicitly authorizes indemnification, lawfulness does not appear to be an issue.  See Is An Immoral Contract Unlawful?  Finally, the indemnitee’s agreement to serve as a director or officer would seem to fulfill the requirement of consideration.  Cal. Civ. Code § 1605.

But what about the statute of frauds?  The California Civil Code generally requires that contracts of suretyship be in writing and signed.  Cal. Civ. Code § 2793.  Articles and Bylaws are in written.  Thus, the only remaining issue is whether they are signed.  The California Corporations Code requires that articles be signed.  Cal. Corp. Code § 200.  Bylaws are not usually signed, but they are often certified by the corporate secretary.

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