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What should indemnification bylaw look like?

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What should indemnification bylaw look like?

Can you see any real benefit to replacing a simple indemnification clause in a nonprofit’s bylaws with two pages of legalese that looks like it was copied from a statute book? It seems WAY over the top to me. There won’t be any board members who read it OR understand it (in my view).

This is a good and interesting question.  We have chosen to include the longer complicated statement from the Nonprofit Corporation Law in our form of bylaws because it spells out clearly what is and what is not permitted.  Simply saying that the organization will indemnify to the fullest extent permitted by law does not indicate what that extent is, and may also commit the organization in situations in which it does not want to indemnify a person.  (Saying only that the corporation may indemnify to the fullest extent of the law is superfluous and does not provide real protection for those to be indemnified.) I agree that most people won’t read or understand the longer provision, until an indemnification issue actually arises.  At that point, it is all there and people don’t have to go to the statute to see what is provided.  (See Ready Reference Page: “Bylaws Function as ‘Constitution’ of Nonprofit Corporations”

There is another issue, involving the advancement of expenses at the start of litigation, that we have tried to address in our form of bylaws, and which would presumably not be adequately dealt with if the bylaw just required indemnification to the fullest extent of the law.   If the board decides to sue the treasurer for absconding with corporate funds, under an indemnify-all provision, the organization could probably not proceed with the suit until it advanced the funds to the treasurer to defend himself or herself.  There are a couple of cases so holding.  All the treasurer has to do is promise to repay the money if ultimately not entitled to it.  But if the treasurer stole to support a gambling habit or other spending beyond income, the treasurer may never be in a position to return all of the money after losing the suit. 

We provide in our bylaws that when an indemnitee is sued by or in the name of the corporation, the board has the power to decide whether or not to advance costs.  If a bunch of members brought a baseless suit, the board presumably would advance defense costs.  But in the case of the treasurer’s theft, it would not.  This choice may all be rendered moot by the terms of a Directors & Officers insurance policy, but we have included it nevertheless.

I understand your aversion to language like that you describe, but I think there is a benefit in being more precise on these particular issues.

Tuesday, January 15, 2013

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